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5 Money Management Strategies for Uncertain Times

Learn 5 money moves you should make now.

By
Laura Adams, MBA
August 16, 2011
Episode #231

 

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The current uncertainty in the global economy and volatility in the financial markets is enough to make even the savviest money manager a little uneasy. Though you can’t control what happens to the price of stocks or real estate, you can control the state of your own personal finances.

Here are 5 smart money moves you should make now to secure your financial future no matter what happens in the economy:

Money Move #1: Create a Financial Safety Net

One of the best ways to protect yourself financially is to create an emergency fund that you can tap in the event of a financial hardship. Keeping cash in a safe place, like an FDIC-insured bank account, is a financial safety net that you should never go without. Don’t invest your emergency money because the value could drop at the exact moment you desperately need it.

If you don’t have an emergency fund, create a plan to accumulate one as quickly as possible. Make a goal to build up enough money to cover six months’ worth of your basic living expenses and debt payments. For instance, if you spend $2,000 each month for food, housing, utilities, insurance, and credit card minimum payments, accumulate $12,000 in your emergency fund. If that sounds impossible, save enough to cover one month’s living expenses and build from there. The secure feeling you’ll get from having an emergency fund to fall back on is well worth the effort!

Money Move #2: Optimize Your Debt

The second smart money move to make right now is to optimize your debt, which is a fancy way of saying you should make it cost less, so you free up extra cash. Interest rates are at historic lows, so whether you have a mortgage, a car loan, or credit card debt, here are three ways to cut your interest rate so you save money:

  1. Loan Refinancing – Doing a refinance means that your old loan is paid off and a new loan is created at a more favorable interest rate. But a refinance comes with fees, so you have to figure the financial break-even point when you fully recover your costs and start to benefit from the refinance. Use the Refinance Breakeven Calculator at dinkytown.com to easily crunch the numbers so you know if doing a mortgage refinance makes sense for your situation. To learn more about doing an auto loan refinance, check out rategenius.com and myautoloan.com.

  2. Loan Modification – If your income has been substantially reduced, you don’t have funds available to do a typical refinance, or you don’t have at least 20% equity in your home, you may be eligible for a mortgage modification. Contact your lender and visit makinghomeaffordable.gov for current program details.

  3. Balance Transfer – You can use a balance transfer credit card to pay off higher-interest debt, such as an auto loan, and move it to a low or no-interest card. The offer is good during the card’s promotional period only, which could range from 3 months to 2 years. The amount you transfer can’t exceed the credit limit you’re offered and may be subject to a fee of up to 5%. Use this strategy only when you know you can pay off the balance in full by the offer’s expiration date. Check out the Balance Transfer Calculator at creditcards.com to see how much you could save by doing a balance transfer.

The less you have to shell out for your debt each month, the more you can squirrel away in your emergency fund.

Money Move #3: Build Wealth and Reduce Taxes

Cut your taxes by investing through a qualified retirement account, like a workplace plan or an IRA. Retirement accounts allow you to defer or eliminate taxes and build wealth for your future at the same time—that’s a winning combination! Additionally, workplace retirement plans may offer matching funds, which is a bonus from your employer that makes your nest egg grow even faster.

Quick and dirty tip: Increase the total amount you contribute to your retirement account(s) by one percent each year until you’re putting away a minimum of 10% of your gross income.

Money Move #4: Diversify Your Investments

Diversification is a simple way to manage risk by spreading it out among multiple investments.

If you’re not sure what investments to purchase in your retirement account, my recommendation is to diversify. Diversification is a simple way to manage risk by spreading it out among multiple investments. When your money is invested in a variety of asset classes that aren’t directly related to each other—such as stocks, bonds, cash, real estate, and commodities, they respond to financial conditions differently. Also, having a mix of domestic and international investments helps you limit your losses and get higher total returns. 

Depending on the menu of investments and funds that are available, consider buying the following:

  • Index fund - mimics the returns of various market indices such as the S&P 500 or the Dow Jones Industrial Average (DJIA).

  • Balanced fund - combines investments in stocks, bonds, and other securities for a moderate risk offering.

  • Target-date fund – invests with a certain retirement date in mind and rebalances asset allocation to create results that are suitable for an investor’s age and investment objectives.

In addition to buying financial securities, investing wisely in real estate or in your own business can be great ways to diversify your money and build lasting wealth. Check out The Winning Investor for more savvy investment advice.

Money Move #5: Simplify Your Life

In order to build wealth, you must have discretionary income—that’s the amount left over at the end of the month after all your essential living expenses are paid. Reducing your monthly expenses will allow you to build an emergency fund and have a cushion, should things take a downward turn, or to save for retirement. Track your expenses each month and see where you can simplify your life, cut spending, and free up more money to create financial security.

Download FREE chapters of Money Girl’s Smart Moves to Grow Rich

If you like these tips, you’ll love my award-winning new book Money Girl’s Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don’t. It’s available at your favorite book store in print or as an e-book for your Kindle, Nook, iPad, PC, Mac, or smart phone. We’re even giving away two free chapters from the book for you to sample at SmartMovesToGrowRich.com!

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