Take Control of Your Finances in Difficult Times

Barbara O'Neill, Ph.D., CFP^{® 1}

(Note: Yesterday, I had minor surgery to repair a torn meniscus in my right knee. Due to a little pain, I have chosen to send you a Financial Tip that is the work of Barbara O’Neill of Rutgers University. I have known Dr. O’Neill for more years than I can remember. I consider her to be one of the greatest leaders in adult education in America and I would like to share her with you. She has granted me permission to send the following. – Rob Weagley)

In addition to real or paper losses on investments, many people have experienced another negative side effect of the current economic downturn and stock market volatility. This side effect is emotional distress due to a perceived loss of control. When the financial news is grim and market indices fluctuate hundreds of points daily, it's real easy to feel that you are helplessly at the mercy of external forces. Research has found that people are especially unhappy in situations where they perceive themselves to have a lack control. It's therefore no surprise that commuting ranks high on the list of things that make people most unhappy. Commuters never know from day to day what traffic gridlock, accidents, and the weather they'll encounter.

Dealing with a loss of control as investors was the topic of a recent article in the Wall Street Journal, which described how investors react to market volatility. It summarized several studies that found that, when our sense of control is threatened, people tend to latch on to whatever small fragments of information are available and to believe that they are reliable. The article also stated "You cannot control whether or not the market will continue to trash stocks, but you can control how you respond." Much of life is like that.

What should you do? The good news is that there are ways to maintain control in times of economic uncertainty. While no one individual, not even the Federal Reserve chairman, can control the economy and the stock market, let alone predict the direction that they are moving, we can control the ways we think and act. Below are eight ways to maintain control over your finances when things are seemingly "out of control":

1. Watch Your Spending- In times of economic uncertainty, it's wise to "live below your means" and practice what economists call "precautionary savings." There is some recent evidence that Americans are already doing this on a large scale. Consumer spending figures are down and, according to the Bureau of Economic Analysis, the U.S. savings rate increased to almost 3% of disposable income in the second quarter of 2008, up from 1% or less during the past three years.

2. Prepare a Spending Plan- Also known as a budget, a spending plan is a written "best estimate" of the cost of future spending and saving. Ideally, a spending plan should balance income and expenses, including regular savings for future financial goals. Worksheets for creating a spending plan can be downloaded from the Rutgers Cooperative Extension Web site. To download a "paper and pencil" worksheet, visit http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf . To download a spending plan spreadsheet, visit http://njaes.rutgers.edu/money/templates/Spending-Plan-Template.xls .

3. Tune Out Market "Noise"- As noted above, people who are experiencing a lack of control put a lot of stock in any information that they hear. Daily financial reports that, by design, report moment by moment market fluctuations, with commentary, feed on market jitters and can cause some people to panic. Consider limiting your exposure to detailed stock market reports (e.g., CNN and CNBC) or, at the very least, keep reminding yourself that you are investing for the long term.

4. Minimize Investment Expenses- Pay attention to the expense ratio (i.e., expenses as a percentage of assets) charged by mutual funds. This information is found in the mutual fund's prospectus, which can often be downloaded from the Internet. Especially at times when mutual funds are experiencing paper losses, there is no reason to be earning anything less. Expenses, along with historical performance, are a key factor in the selection of a mutual fund. Look for stock funds with an expense ratio below 1.4%. Many index funds are much lower than that. One thought might be to sell your current funds, realize the losses on your investments to reduce your taxes, and reposition your assets in lower cost funds or a diversified set of index funds for your future. This is one way you can reposition, IF YOU NEED TO, while capturing something positive from this negative environment.

5. Save Money, Be Happy- The insurance company Northwestern Mutual recently conducted a study that found that people who do things that constitute good planning tend to feel happier than those who don't. Specific practices that made "planners" feel better about life included setting financial goals, taking steps (read: saving) to achieve goals, and spending within a budget. If you don’t have a plan, you’re adrift in this sea of uncertainty. If you need help with your plan, hire a quality, client-centered advisor to help you with your plan.

6. Study Investment History- Financial markets often seem less scary when someone has previously experienced a grueling bear market and/or has learned about the characteristics and historical performance of investments. (We old goats have been through times in history that are similar to this time in history. Listen to those that are older and more experienced. It may provide some insights that are new to you.) We know from history, for example, that stocks can be very volatile day to day but, over periods of 10 years or longer, volatility is greatly reduced. A good source of information about investing is Rutgers Cooperative Extension's Investing For Your Future home study course at www.investing.rutgers.edu <http://www.investing.rutgers.edu> . In times of turbulence and change, knowledge is power! (This is a GREAT home study course!!! – rw)

7. Consider Getting Professional Advice- Professional financial advisors can provide perspective to nervous investors during uncertain economic times. They also have many helpful tools, such as software to run retirement income withdrawal scenarios that can estimate how long someone's money will last. To locate a financial advisor, start by asking for referrals from other trusted advisors such as a CPA or attorney. Friends and co-workers may also have suggestions. "Find a planner" links by state are also available online at www.napfa.org <http://www.napfa.org> and www.fpanet.org <http://www.fpanet.org> .

8. Take Care of Yourself- The last thing that someone needs in an uncertain economy is health problems, especially if your job (and access to health insurance) is shaky. Major health "issues" such as diabetes and cancer, are expensive to treat and a drain on household wealth. Put the odds in your favor by taking charge of your health. Specific actions such as losing weight, exercising regularly, and quitting smoking provide many associated financial benefits. Health is, indeed, our greatest wealth.

Yes, the economy and the financial markets can seem out of control today, but the best remedy for economic uncertainty is controlling things that we can. Numerous studies have confirmed that people who maintain some measure of control over their lives in times of crisis and uncertainty generally cope better and feel less powerless than those who don't. Making plans, and revising them when needed, is also a characteristic of financially savvy people. Abraham Lincoln once said "The best way to predict the future is to create it."

Rutgers Cooperative Extension has personal finance information available online including downloadable worksheets, self-assessment quizzes, and pre-programmed Microsoft ExcelR templates for personal financial calculations. Visit http://njaes.rutgers.edu/money2000/ <http://njaes.rutgers.edu/money2000/> to learn more. The University of Missouri has many publications as well located at http://extension.missouri.edu/explore/hesguide/famecon/ . Importantly, the Cooperative Extension system's online eXtension (pronounced ee-extension) information delivery system has personal finance experts who can answer your questions and provide additional resources. (The system of land-grant colleges and universities, across the United States, feed into this system.) To access the eXtension personal finance Web site, visit http://www.extension.org/personal_finance .

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211