Dear Carrie, I can't help but feel worried about the coming year and how all the political changes may affect my finances. I don't have a lot of money, but I want to be smart about handling and protecting what I do have. Is there anything specific I can do?
Dear Reader, I'm getting a lot of questions from readers who are understandably apprehensive about what's in store for their money in the coming year. So much is up in the air: taxes, interest rates, health care choices and costs, the future of Medicare and Social Security. All of these things have the potential to impact the economy, the financial markets and our wallets.
But here's some good news. Although we can't predict or control the future, we can prepare ourselves by sticking to some time-tested basics of money management. After all, even though we may not be aware of it, we all live with uncertainty every day.
The best way I know to feel more in control is to take action. So here are some thoughts on things you can do to help ease your anxiety. Even as market forces change, these principles hold true. In fact, it's in times of uncertainty that they're probably the most valuable of all.
First and foremost, it's important you don't overreact. Regardless of what's happening in politics, don't panic. Think back to the dramatic market decline of 2008. It was an extraordinarily stressful time, but the investors who suffered long-term were those who panicked and sold at a low.
So don't let your emotions lead you astray. Instead, let your situation, your personality and your goals be your guide. Money that you know you'll need in the next three to five years shouldn't be in the stock market. And if you're close to retirement, make sure you have a healthy cash cushion.
The unknown is always a little scary but there are some basic things you do have control over no matter where the political or economic winds blow. Here are three practical ways to protect yourself:
--Beef up your emergency fund. Everyone should have an emergency fund to cover at least three to six months of necessary spending. But if you're feeling uncertain about the future, and especially if you're nearing retirement, you may want to increase your cash reserves even more.
--Reduce your debt. An industry rule of thumb is that no more than 28 percent of your pretax income should go toward home mortgage debt, and no more than 36 percent should go toward all debt. However, in uncertain times, it may be wise to stay well below these levels. Certainly if you're carrying credit card or other expensive, nondeductible debt month to month, make a plan to pay it off as soon as possible.
--Be well insured. Insurance always seems like a colossal waste of money -- until you need it. If you don't have great health insurance, get it now. Ditto on auto, disability and homeowner's insurance, and possibly life or long-term-care insurance, depending on your situation.
It's also important to rebalance your portfolio. Periodic rebalancing is always important--but it's probably even more crucial when markets adjust. This is because as "winning" investments gain in value and take up a larger portion of your portfolio, other investments shrink in comparison. This will change your asset allocation, potentially exposing you to increased risk.
One way to compensate is to sell a percentage of the asset classes that have performed well and use that money to buy more of the asset classes that have done poorly. This way, you're not only taking profits, you're actually buying low and selling high. Alternatively, if you're adding money to your portfolio, you can invest in categories that have underperformed. Sounds counter-intuitive -- but rebalancing is a cornerstone of smart investing.
Numerous studies have shown that planners prevail. They set goals, establish priorities, and obtain more wealth. Managing your money is too important to leave to chance.
If you've never worked with a financial planner, this could be your year. A financial plan can be a great way to organize your finances and make sure all the pieces are working together. Or if you're not ready to go the formalized route, at a minimum take a hard look at your goals and crunch the numbers to make sure you're on the right path.
Change can be disconcerting but it can also mean new opportunities. Yes, there are unknowns ahead. But if you're smart and diligent, you'll not only be able to roll with the punches and protect your money, you'll be able to help it grow.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at askcarrie@schwab. com.