"Reversal of Fortune" - October 4, 2009

If you are a perpetual optimist, you can always find something good that, like the Phoenix, rises from the ashes of something bad. Take the generational bear market of 2008. From the peak of the market to its lowest point, the U.S. stock market was down more than 50%. Even the most recent market run-up has left the vast majority of investors with steep losses from the peek of their portfolio. So where’s the silver lining? Prior to the stock market crash, the savings rate in America hovered between zero percent and negative. Fast forward twelve months and today that savings rate is an amazing six to seven percent. Research suggests that this is likely a long term trend. As a financial advisor, it’s great to see people taking financial responsibility and doing what they should be doing…saving. It appears that the bulk of this savings is going into money market accounts for the purpose of storing up cash in the face of job uncertainty. As workers begin to regain a sense of job security, they’ll need to develop a plan for their current and future savings. Here are five suggestions:

Contingency Reserves. Finally, everybody understands the true meaning of contingency reserves. Having money set aside for unexpected expenses and opportunities is a good idea.
Debt Reduction. Part of accepting financial responsibility is avoiding paying eighteen to twenty-one percent to borrow money for consumer purchases. It’s nothing more than borrowing from your future to pay for your past.
Systematic investment program. Get in the habit of paying yourself first from a portion of every paycheck. After a few months, you’ll find you don’t miss the money and after a few years, you’ll be amazed at your progress.
Save for College. The 529 College Savings Plan remains the best strategy for saving for your children’s education. As a bonus, the rules allow you to remain in control of the money until you actually spend it on qualified college expenses. This means that if you have a financial emergency, you could tap those funds. There is a 10% federal penalty, but that penalty may be partially or fully offset by tax deferred growth.
Invest in a Roth IRA. If you qualify, a Roth is a good choice because you can access your money without penalty after five years. If you don’t need it before retirement, your money will have grown tax deferred and withdrawals during retirement are tax free forever.

Plan to take your monthly savings and divide it equally among the above objectives. Automate your plan as much as possible and use any pay increases to increase your savings.