What are the steps I should take to make sure I am in good financial shape? My wife's job may be eliminated next year and I want to make sure we are prepared in case it happens. Also, is it a good idea ato continue to contribute to a 401K? We could use the extra money now.
Make sure you have an Emergency Fund - especially now with unemployment rising, it is good to have 3-6 months of cash available. Your emergency fund should be able to cover necessary living expenses such as mortgage, utilities, food etc. The rule of thumb is 3 months worth of expenses if you have two income earners and 6 months if there is only one income earner. The purpose of an emergency fund is to help you through those difficult times, such as illness or job loss, without having to dip into retirement accounts or taking out loans. An emergency fund should be in an easily accessible account but one that you only dip into in case of emergencies!
Spend less than you make and save as much as you can - it sounds almost too simple, but not enough of us do it. Make sure you are not making any unnecessary purchases and building up any debt. And by all means continue to contribute what you can to your 401K, even if your employer is not matching the amount you save. You’ll still benefit by reducing your taxable income, while adding to your retirement account. However, if you do not have your emergency fund established, that is a priority and you may need to temporarily reduce your retirement savings until your emergency fund is in place.
Put together a budget - now is a great time to track your expenses. Look back over the last few months. What are your necessary expenses vs. your discretionary expenses? Seeing where your money is going helps us to be more disciplined in our spending! Make sure you are paying yourself first. This is money for your emergency fund and your retirement fund.
Use credit cards wisely - pay them off every month. Use them to take advantage of the cash back, not to use them as a loan. You want to make sure you aren’t carrying a balance from month to month, and are paying down any balances you may have. If you do have a balance, call the company that issued the card. You may be able to get it reduced. The high interest rates charged on credit cards are one of the worst ways for expenses to get out of control.
Review and rebalance your portfolio - with the changes in the market in the last year, most portfolios are no longer in proper balance. Having a balanced portfolio helps to minimize risk and maximize return. Your balance will depend on your age, risk tolerance, number of years until retirement, and current financial situation. The goal is to reduce risk (chance of losing money) through diversification, while increasing your return. A very rough rule of thumb is to have your fixed income percentage equal to your age. Fixed income investments include bonds or preferred stocks. They produce a regular or “fixed” amount of return. The rest of your portfolio should be diversified in equities (stock) using low expense index funds.
Make sure your credit cards are paid off every month. If you are strapped with credit card debt, you may be able to get your interest rate lowered, saving you a lot of money and avoiding damage to your credit rating. Do it now before you get into an emergency situation. I had success getting my credit card interest rate reduced by asking the credit card company to lower it. I had been a good, pay-on-time customer for many years and I used that to my advantage. I asked them what my interest rate was and asked them to lower it so I wouldn’t have to look around for another credit card provider with lower interest rates. They immediately shaved 10 points of the rate! I found out this trick through lowcards.com. A friend had a similar outcome through information he received on bankrate.com and credit.com. The bottom line is that they make so much money off of you, they don’t want to lose you to a competitor. Use that to your advantage… act like a valued customer, not like a victim when you talk with them. One word of caution - if you have membership points with the card, you will forfeit them if you cancel the card to sign up with another company. I have 250,000 points I didn't want to lose, so the outcome was even sweeter when they decided to lower my rate.
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