Personal Financial Planning For Less Stress and More Success

October 21, 2019

Nobel Prize-winning economist Paul Samuelson once joked that, “The stock market has predicted nine out of the past five recessions.”

His point was that there hasn’t been a system yet devised that can predict when the next economic downturn is coming. One could happen tomorrow or 10 years from now.

Although you can’t control what the economy does, you can certainly control your reaction to it.

Financial plan for whatever the economy throws your way

By putting together a financial plan now, you will be in a far better position to handle whatever the economy throws your way.

Not a financial expert? Don’t worry. As the famous motivational author Zig Ziglar once said, “You don’t have to be great to start, but you have to start to be great.”

Here’s a plan to start you on your way:

Have a healthy perspective (don’t panic)

Booms and busts are a natural part of the U.S. business cycle. The good news, expansions last far longer than contractions. Since the Great Depression, the longest contraction lasted only 18 months (December 2007 – June 2009). So, from a planning standpoint, work toward creating a cash cushion that you can fall back on should another downturn occur.

Reduce your high-interest debt

If you’re carrying big, high-interest balances on your credit cards, work toward reducing them. There are several strategies to help you accomplish this task. The first is to simply call your credit card company and ask for a lower rate. If you have always paid your bills on time, your company might extend a more sympathetic ear, especially if you happen to mention that their competitors are offering lower rates.

Failing that, move to option No. 2 by transferring your balance to a low-interest credit card. Indeed, you might find you can transfer your balance to a credit card that has a 0% APR for 12 months or longer. Pay special attention to whether the card company charges a transfer fee.

Another tactic would be to take out a debt-consolidation loan. This approach might at first seem counter-intuitive (taking out another debt?), but remember your goal is to slash your high-interest debt by all means possible. A debt-consolidation loan will roll your high-interest debts, such as credit card bills, into a single, lower-interest payment. This approach works best if you have good credit. The concept is easy to illustrate. Say, you have three credit cards, ranging from 15% to 24.99%. By taking out an unsecured debt consolidation loan at 7.5%, you will significantly lower your interest rate and reduce your debt faster.

If you’re a homeowner, it also might make sense to take out a cash-out refinance loan, especially in this low-interest environment. With a cash-out refinance, you will increase your mortgage balance by the amount of credit card debt you’re paying, but this increase should be easily offset by the elimination of your high credit card expenses.

Consider a reverse mortgage loan

If you’re 62 or older and own and live in your own home, you may also want to consider a reverse mortgage loan, which again may allow you to exchange high-interest debt for more manageable debt. In fact, with a reverse mortgage, you can choose to defer repaying your loan until you leave the home. You are still responsible, however, for the payment of property taxes, homeowners insurance and the upkeep of your home.

Your reverse mortgage will first pay off your current mortgage (if one remains), and your remaining equity will be converted to cash and distributed via a payment plan of your choice. This one-two punch (no mortgage and the payout of loan proceeds) should leave you with more cash each month to put toward eliminating your high-interest debts.

Apply for a line of credit

There are personal lines of credit, home equity lines of credits (HELOC) and reverse mortgage lines of credit. The advantage of any of them is that, outside the cost of setting up the loan, your’re typically only charged interest on the portion of the line you use. So, opening a line of credit might be worth having in your hip pocket for life’s “just-in-cases,” of which there seem to be no shortage, such as a job loss, sudden illness or unexpected home or auto repair.

For a personal line of credit, you’ll typically need an above-average credit score and a solid history of repaying your debts on time. Because a personal line of credit is unsecured, expect to pay a higher interest rate than you will for either a HELOC or a reverse mortgage line of credit.

Lending limits for a HELOC depend on your available home equity (i.e., your home’s value minus what you owe on it). Typically, you can borrow up to 85% of what that amount is. During the draw period (usually the first 10 years of the loan), you can borrow as much or as little as you need, up to your limit. At the end of the draw period, the repayment (typically 20 years) begins.

Be sure to carefully read the terms and conditions of your loan contract because your financial institution may reserve the right to lower or even cancel your credit limit, as happened in the last recession.

However, with a reverse mortgage line of credit, once your loan has been approved, your credit line can’t be lowered. In fact, some reverse mortgages feature a built-in growth rate, which is calculated by adding the initial interest rate (IIR) to the annual mortgage insurance premium (MIP). So, if your IIR were 4.50% and the MIP were 0.50% (the current MIP in 2019), your credit line would grow at annual rate of 5%. Now imagine, if you opened your line at age 62, the earliest age you can qualify for a reverse mortgage, but didn’t touch it for 10 or 20 years. This strategy could provide you with a lot of extra financial firepower, when you may need it most.

once your reverse mortgage lender establishes the value of your home this cannot change

Your reverse mortgage line of credit also serves as a hedge against falling home prices. Once your reverse mortgage lender establishes the value of your home, for the purposes of the loan, this assigned value cannot change regardless of how much the housing market drops.

Expand your emergency fund

To get you through a financial emergency, the rule of the thumb has been to have a six-month cash reserve to cover your housing and utilities, basic necessities like food and personal care, and other financial obligations like auto loan and insurance payments. Of course, there’s no rule that says your reserve fund can’t be larger to give you added protection against a prolonged financial setback.

To help you save and beef up your emergency fund, there are a bevy of money-saving apps that link to your debit or credit card that will round up your purchases to the nearest dollar and funnel your digital change into your designated savings or investment account.

Invest in your professional self

No one is ever too old to learn new skills. Any new skills you acquire may give you exactly the edge you need to retain your current position if the company you work for is in downsizing mode. Non-essential employees usually get laid-off first, so think of adding an in-demand skill that will make you indispensable to your employer.

And should you still get laid off, you can tackle the job market with greater confidence, knowing you’ve added a highly marketable skill to your resume.

While you’re still working, also take the time to freshen your professional network. It’s been reported that up to 85 percent of all jobs are filled via networking.* The best time to reach out and reconnect with your former colleagues or form new professional relationships is when you don’t need help or a favor. Become a familiar face at your company’s sponsored seminars, conferences, lunch-n-learns and other get-togethers, so when you do need a referral or a connection, you won’t feel awkward asking for one.

Think about liquidating big-ticket items

It’s much easier to sell big or expensive assets in a hot market. If you have been thinking about downsizing your primary house or selling the family vacation home, now may be the time to act. Strike while the market’s hot.

Review and reallocate

If you’ve had the good fortune to be invested in the more than decade-long bull market, you may find that you now own too many stocks in relation to your other investments. Meet with your financial advisor or tax accountant and discuss rebalancing your portfolio so that it better reflects your retirement goals and more prudently spreads your risk among many assets. If you need any incentive, recall that in the last recession, the S&P 500 index fell 57 percent from its October 2007 peak to its trough in March 2009.**

Be proactive about your health

If you have medical treatments that you’ve been putting off, and if you have already met your insurance deductible under your company’s insurance plan, schedule the procedures before the end of the year. Delaying treatment could be bad for not only your finances but also your health.

Keep up your skills

Even if you’re retired, semi-retired, working part-time or just volunteering, you should never stop learning new skills or enhancing your current skill sets.

Put your plan in action sooner than later

Maintaining your skills and industry contacts is an inexpensive insurance policy to have in case you decide you want or need to go back to work. Keeping your options open is simply a good financial planning strategy for every stage of life.

Resolve to put your plan in action sooner rather than later. As famous automaker Henry Ford once said, “If you don’t think of the future, you won’t have one.”



Topics in This Article