FEATURES, WORK & MONEY

from the December 31, 2001 edition

What to do in 2002

Aaron Pressman Special to The Christian Science Monitor

- Over the past year, stock markets tumbled, then roared back, then tumbled some more. Interest rates went down, down, down as Alan Greenspan and the Federal Reserve tried to stimulate the economy.

No one knows which way the market will head in 2002. But regardless of what happens, individuals can take steps to get their personal finances in order.

To be sure, not everyone's situation is the same, and more specialized advice may be appropriate for some people, such as those nearing retirement or starting a family.

Still, it's never too soon for some do-it-yourself planning. So as we head into the New Year, consider these 10 resolutions put forward by financial experts:

1. Adjust your expectations on investment returns.

Way back in the days before the Internet bubble popped, say 1999, high-flying, high-tech stocks were the place to be. Back then, the Nasdaq gained 85 percent, and some high-tech mutual funds did even better. But since April 2000, tech stocks have crashed to earth. If you're hanging on to shares that have dropped, hoping for a rebound - or looking for the next big wave to ride - you may be waiting a long time.

"Unrealistic expectations are just that," says Benjamin Tobais, a Florida-based financial adviser who experienced bear markets in 1973-74, 1987, and today.

He and many other advisers recommend what has long been the wise investor's course: a strategy of diversification. That doesn't mean avoiding all specialty or sector mutual funds, as long as those riskier investments are part of a balanced portfolio. Overseas investments, which have underperformed the US market for several years, should be part of a diversified strategy, but are out of favor with investors, Mr. Tobais says.

Lower interest rates also mean you should trim your expectations on fixed-income instruments such as CDs and money markets.

Watch out for triple-A rated funds that invest in mortgage-backed securities, experts say. The high credit rating means you don't have to worry about defaults, but as mortgage borrowers refinance their loans, the funds can lose yield and principal.

And while pruning your portfolio of former high-fliers, remember that you can use up to $3,000 of your losses as a deduction on your income taxes, even if you aren't reporting any capital gains. And if your losses exceed $3,000, you can deduct them in future years.

2. Open a retirement account.

If you haven't already begun to save for retirement, make 2002 the year to start.

"The biggest [factor] if you're saving for retirement is time; the more time you have, the better your retirement savings are going to be," says Dayana Yochim, who runs the investor-education program at the Motley Fool website.

Sock away $2,000 a year in a retirement account over the next 20 years and you'll have put in $40,000. If you manage an average return of 8 percent over that period, you'll have earned an additional $60,000.

There are myriad ways to save while minimizing taxes. Employers that offer 401(k) plans usually match a portion of their employees contributions - what Ms. Yochim and others like to call "free money."

But watch out for employers that force you to put your retirement money in their stock. You won't have a diversified nest egg and, as employees of Enron recently discovered, if your company hits the skids, you may lose your job and your savings at the same time.

If you already have a retirement account, you can save even more in 2002. Congress raised the amount that can be set aside in 401(k)s to $11,000 next year and up to $3,000 in traditional and Roth IRAs.

With most accounts suffering from the last two years of falling equities, 2002 is an opportunity to refill your coffers - and reduce your income-tax burden.

3. Pack your workplace parachute.

In a shaky economy, almost no one's job is guaranteed. Be sure you are protected against an unexpected pink slip.

Ric Edelman, author of "Financial Security in Troubled Times" (HarperBusiness), recommends quizzing your employer about the financial status of your company. It may be appropriate to negotiate a severance agreement, especially if you're changing jobs. Just remember that the agreement won't protect you if the firm declares bankruptcy.

A lot of people cash out their retirement savings when they get laid off, but that's an expensive cushion, since you have to pay tax penalties for the early withdrawal.

To avoid such hazards, keep a cash cushion of at least three months of living expenses, preferably six months. This money shouldn't be invested in stock funds, or even in less risky bond mutual funds. (You can lose your principal in a bond fund, Mr. Edelman notes.) Keep some cash in the bank or a money-market fund.

"Don't focus on the return on your money - focus on the return of your money," Edelman says. "The fees and risks [on bond funds, for example] dwarf the benefits of potentially higher returns."

4. Refinance and consolidate debt.

The Federal Reserve cut short-term interest rates a record 11 times in 2001, and borrowing costs across the economy have declined, especially for home mortgages.

That makes it a good time to refinance or search for a low-rate credit card. But act fast - some rates have already risen since early November.

How can that happen when the Fed just cut rates again Dec. 11? Banks set mortgage rates based on the level of the 10-year Treasury bond. The yield on those bonds has risen in recent weeks.

Not surprisingly, the average rate on 30-year fixed rate mortgages has hit 7.11 percent this month, up from close to 6 percent in November, according to Bankrate.com - a good resource for finding the lowest rates in your local area. (The website also tracks credit-card and auto-loan rates.)

If you can still lop off a few points, remember that you'll incur some costs to refinance, so it may not make sense if you only have a few years left on your loan or plan to move soon.

5. Review your credit report.

Identity theft remains a growing problem, so consumers need to check their credit reports for fraud at least once every two years.

Federal law gives victims of identity theft the right to sue credit bureaus that OK fraudulent borrowers, but the process of clearing up your name can be long. You've got to be vigilant.

The Supreme Court ruled last month that the law's two-year statute of limitations starts ticking from the time of the fraud, not from when a victim discovers the crime. So if someone has misused your credit report to borrow in your name, you need to find out as soon as possible - not years later when you're turned down for a home mortgage due to an imposter's recklessness.

Consumers can review their files free at any of the three credit-reporting bureaus if they've been turned down for a loan. Otherwise, residents of a handful of states can get a free report, but most people will have to pay up to $8.50 for a copy. Contact Equifax, www.Equifax.com (800-685-1111); Experian, www.experian. com (888-397-3742); or Trans-Union www.transunion.com (800-888-4213).

6. Time those big purchases.

Is this the year for a new car or home? A little advance planning can save you a bundle.

Interest paid on a home mortgage can be a huge tax deduction - if you file an itemized return.

If you take the standard deduction, you get no benefit. So if you're buying a home late in the year, try to close the deal early the following year.

It's also wise to plan new-car purchases. Jeff Ostroff, who runs the website carbuyingtips.com, collects purchase price reports on new cars from consumers year-round. He recommends buying a car the last two weeks of the year, when dealers are closing their books, and the July to October period, when dealers are trying to make room for the next year's models.

Mr. Ostroff is more skeptical about the traditional tip to buy at the end of the month. "Some salespeople will be just as hard to haggle with on the last day of the month as they are on the first," he says.

And of course, be sure to check several auto-sales websites, such as Autoweb.com and CarsDirect.com, for current prices before heading to the dealer.

7. Don't "over buy" new technology

. Running out of hard disk space or pining for a faster Internet connection?

It may be wiser to make a few upgrades than to buy a whole new PC. Remember that a faster processor chip inside a new computer will spend most of its time doing nothing while you read e-mail, type a memo, or play solitaire.

It may be more cost-effective to replace your hard drive or add memory. The cost of both of those options has fallen tremendously. If you do decide to buy a new PC, watch out for the fine print in "no interest, no payment until next year" credit plans. If you haven't paid off the entire loan by the time payments begin, you're charged interest all the way back to the time of purchase.

The speed of Web surfing is more dependent on the speed of your connection to the Internet than the speed of your computer. But many people are discovering that even the faster - and more expensive - connections like cable modems and Digital Subscriber Lines (DSL) don't give them the amazing speed boost they expected.

That's because there are numerous bottlenecks far out in the network at popular websites and key Internet traffic connection spots. There's also a lack of competition among so-called broadband providers after many of the smaller companies went bankrupt this year.

That's meant price increases for subscribers, and more could be on the way in 2002. Unless you do a lot of file downloading, that pokey 56K modem doesn't look so bad after all.

8. Check your insurance coverage.

Insurance agents are seeing a rush of inquiries following the terrorist attacks of Sept. 11. There's no need to be motivated by fear, but it's not a bad idea to review your coverage.

"Most people are underinsured, so it does make sense to look at this," says financial adviser Rick Fingerman, of Medford, Mass. "[Insurance] is a necessary tool to take care of those catastrophic things that tend to happen."

When considering how much insurance to carry, consider not just replacing lost income needed to support a family, but also large, one-time expenses like college tuition that may be on the horizon.

It's also worth reviewing any exclusions on your policy. Many insurers won't pay for deaths due to acts of war and are adding exclusions for acts of terrorism.

9. Improve the aim of your charitable giving.

When you make donations to charity, make sure the bulk of your donation is going to help people in need.

It's easier than ever to check up on the performance of national charities.

The Better Business Bureau and the National Charities Information Bureau offer a revealing look at hundreds of charities on their website, www.give.org. Other watchdog groups rating charities include the American Institute of Philanthropy (www.charitywatch.org) and Philanthropic Research (www.guidestar.org).

Small local charities tend to be highly efficient in terms of distribution. They need your support as the recession puts people out of work and on the streets. A survey of 27 big cities released Dec. 12 by the US Conference of Mayors found requests for emergency food assistance were up by almost one-quarter from last year and requests for shelter rose more than 10 percent. But only one-third of cities said they had enough food to meet the requests, and most are cutting back on what they provide.

Find a nearby homeless shelter or food bank and donate nonperishables or money. Many also need volunteers to help serve the hungry. America's Second Harvest, a network of hundreds of local food banks, keeps a list of places to donate on its website (www.secondharvest.org/foodbanks/foodbanks.html).

10. Take a day to plan your vacation.

Think 2002 is the year of incredible, last-minute travel bargains? You're half right. Airlines, cruise lines, hotels, and car-rental agencies are all vying for a smaller pool of vacation travelers since Sept. 11, and with the economic slowdown many bargains are available.

But those same travel-related companies have also reduced service and, for some dates, even raised prices. Flexibility is the key to getting the best deal, according to long-time travel agent JoAnne Kochneff of Grand Rapids, Mich.

"In cases where vacationers are trying to plan spring break with the kids on only certain days, that could be difficult to find a good value," Ms. Kochneff warns.

"But if you just want to get out of the cold weather, then there are some incredible deals being offered, especially in the cruise industry," she adds.

And with many carriers in a precarious financial state, travel insurance from a reputable insurer may be wise, she says. Such plans, which can cost $100 or more, cover you in case your vacation provider cancels your trip. But scrutinize the policy before you buy. Some now exclude bankruptcies or cancellations due to terrorist acts.

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