Seeking Solid Financial Footing for the Next Decade: 10 Tips for 2010
Over the last several decades—even before Americans first felt the brunt of the recent economic crisis—the financial landscape in the United States has been changing dramatically. The responsibility of saving for retirement has shifted from the employer to the employee. The cost of a college education has risen dramatically. And financial products have become more complex—making saving and investing increasingly complicated for American families.
While many American adults might believe they are adept at dealing with day-to-day financial matters, their actual financial behavior tells a different story. As findings from the FINRA Investor Education Foundation’s National Survey underscore, far too many people tend to engage in financial behaviors that generate excessive expenses and fees. And all too few are able to calculate basic interest and perform other math-oriented tasks. In addition, few people seem to compare the terms of financial products or shop around before making financial decisions.
FINRA and the FINRA Foundation aim to provide Americans with the tools and information they need to make sound financial choices. At the dawn of a new decade, here are 10 tips to help you stay on track with your finances:
- Figure out how much to save for retirement. According to the National Survey, nearly three of every five Americans who are not yet retired have not done the math to calculate how large their retirement nest egg should be. FINRA’s Retirement Calculator and retirement resources can help.
- Rebalance your retirement savings. Because different assets can grow at different rates, over time your portfolio can veer away from the asset allocation you originally chose, impacting your exposure to risk. That’s why periodic rebalancing is so critical. Yet fewer than one-third of National Survey respondents with self-directed retirement accounts (such as a 401(k) plan or IRA) reported rebalancing their holdings at least once a year—and nearly half said they rarely or never do so. Especially following the stock market’s precipitous fall in 2008 and dramatic recovery by the end of 2009, rebalancing your portfolio in 2010 could be a smart move. For information on when and how to rebalance, read FINRA’s Smart 401(k) Investing.
- Take advantage of tax breaks for college savings. Parents typically hope their children will go to college. While funding a child’s college education is one of the more predictable expenses many families face, college tuition costs have been trending upwards, making saving for college all the more important. Yet the National Survey found that well below half (only 41 percent) of respondents with financially dependent children have money set aside for college. Among those who have, only 33 percent reported having used a tax-advantaged savings account, such as a 529 Plan or Coverdell Education Savings Account. Learn more about smart strategies for saving for college.
- Diversify your portfolio. Diversification is a time-tested method of managing risk by spreading your investments both among different asset classes—meaning stocks, bonds and cash—and within each asset class. Although the concept may sound simple, the National Survey found that one-quarter of those who rated their financial knowledge as “very high” could not correctly answer a question about risk and diversification. The question asked whether investing in a single company stock is safer than investing in a stock mutual fund—and the correct answer is no. For more on risk and smart diversification strategies, read FINRA’s Managing Investment Risk.
- Check the background of your financial professionals. According to the National Survey, only 15 percent of those who have worked with a financial professional reported that they had checked the professional’s background or credentials with a state or federal regulator. Investing a few minutes of your time to take this essential step up front could save you time, money and other trouble down the road. FINRA BrokerCheck is a free tool that allows investors to check the professional background of brokerage firms and individual brokers, and investment adviser firms and representatives. Learn more about checking out investment professionals.
- Shop around for financial products. When it comes to choosing financial products—such as credit cards, auto loans or mortgages—most Americans either do not comparison-shop or conduct only limited searches for the best prices or terms. For example, while two of every three Americans have at least one credit card, 63 percent of National Survey respondents said they did not compare offers. Whether for loans or investments, comparing costs and terms can save you money.
- Create a rainy day fund. The National Survey found that a majority of American adults (51 percent) have not set aside sufficient emergency savings to cover expenses for three months in the case of sickness, job loss, economic downturn or other emergency. To get started, aim to set aside at least one month (and preferably three to six months) of your current salary in a federally insured savings account. And don’t touch it unless absolutely necessary. Learn more about creating a rainy day fund.
- Check your credit report and score. You need to do both. Only 38 percent of National Survey respondents stated that they had obtained a copy of their credit report within the past 12 months. Yet 68 percent have at least one credit card—and most have two or more. With credit hard to obtain and identity theft a continuing problem, it is critical to verify whether your credit history is accurate and correct any discrepancies immediately. Just as your credit report is like a financial transcript, your credit score is your financial GPA. Failing to pay monthly balances in full or making late payments can result in finance charges or fees—and these behaviors can also hurt your credit score. A low score, in turn, not only can raise your costs of borrowing or prevent you from qualifying for credit, but also can impact your ability to get insurance, an apartment or even a job. Learn more about how your credit score affects you and what helps and hurts your credit score. For your free credit report, call (877) 322-8228 or visit www.AnnualCreditReport.com.
- Avoid overdrawing accounts. Nearly one-quarter (23 percent) of National Survey respondents with checking accounts reported overdrawing their accounts on occasion—and 73 percent of those who overdrew accounts also reported having difficulty covering their monthly expenses and paying their bills. According to a 2008 study by the Federal Deposit Insurance Corporation, most banks automatically enroll customers in overdraft programs. As a result of these programs, the bank will automatically process checks, ATM withdrawals and debit card transactions even when there are insufficient funds in your account—and you will be charged an overdraft fee. While overdraft protection may seem like a helpful feature on a checking account or debit card, be aware that overdraft fees can add up. The best ways to protect yourself are to balance your checkbook so that you know how much money is in your account and ask your bank to let you opt out of any program that automatically approves ATM and debit card transactions. For more on how to avoid overdraft fees, read the Federal Reserve’s Protecting Yourself from Overdraft and Bounced-Check Fees.
- Review your insurance coverage. Only half of National Survey respondents who reported having at least one form of insurance (health, auto, homeowners or life) said they reviewed their insurance coverage at least once a year. And one in seven (14 percent) said they never did so. Taking the time each year to assess whether your insurance coverage aligns with your needs is a smart strategy—especially if recent life changes have left you under- or over-insured. For example, if you are young and single with no dependents—or if you are an empty-nester with a fully paid home—you might need less life insurance than someone who is financially responsible for others (such as children or aging parents), has a mortgage or both. More information is available on the Web site of the National Association of Insurance Commissioners.
The start of a new year is always a terrific time to take stock of your finances and to embrace new habits to get—and stay—financially fit. Even if you were not thinking about saving and investing when the clock struck midnight on New Year’s Eve, it’s not too late to set fresh financial goals. Take time to make a long-term financial plan—and stick with it. Make sure your plan includes a realistic spending plan that not only allows you to make ends meet comfortably and keep your debt under control, but also includes line items for saving and investing for each of your financial goals. When making financial decisions, be sure to comparison shop and check out both products and professionals before you invest. And remember that staying diversified and understanding risk are the best resolutions you can make for managing your finances over the long term.