Surviving these challenging economic times

As we face the challenges that abound in this ‘day and age’, the need to have a sound financial plan has now been brought to the forefront. With the instances of high prices and unemployment it cannot be business as usual.

Governments worldwide are creating plans to find ways to prevent additional fall out. The Jamaican government is no different, as they take steps to stabilize the declining Jamaican dollar. As they attempt to bring the economy back into equilibrium we too should seek to stabilize our financial positions and our households.

Most of us have experienced or know someone who has been adversely affected by these adverse economic conditions. Job losses proliferate, the stock market is still trying to get back on track and no one knows when it will all get back to “normal”. We should use this as an opportunity to get our financial house back in order. Make it your financial resolution to make 2014 the year you get back to basics.

The following are financial tasks we must tackle in order to stabilize our financial future.

Prepare a budget

Preparing up with a budget is a key factor in taking control of your finances, especially if you’re usually out of money by the time payday rolls around.

A budget doesn’t have to be about deprivation; it’s about seeing how you’re spending your money and deciding where to make the necessary adjustments or cut backs.

Start by keeping a list of everything you spend each month. Then, divide the list into categories (utilities, mortgage/rent, entertainment, etc.), add the numbers up, and go over the results carefully. You may be shocked at how quickly what you deemed as “little” expenses — a shake on the way to work every morning, a movie every weekend — add up. And you may be pleasantly surprised at how easily you can make those spending adjustments and boost your savings.

Pay down debt

Once you have a budget in place and you can identify where your money is going, you will need to set up a plan for paying down debt. It is also important to note that not all debt is bad. Having a mortgage with a reasonable interest rate on a house that is well within your means is not a bad thing. Credit card debt, though, is a different “beast” all together. Whereas a home is usually an appreciating asset, the purchases you make with a credit card are almost entirely depreciating assets.

With the excess money you identified from creating a budget and eliminating some of the unnecessary variable expenses, it is advisable to increase the amount you pay on your credit card assuming you have an existing balance and do not pay the amount in full every month. If you have multiple credit cards with outstanding balances, pay off the card with the highest interest rate first. This will enable you to “save” money on the interest that compounds every month. Once your first card is fully paid, add the amount you were paying monthly to pay off this card to the amount you pay monthly on the next card with the highest interest rate. Continue to do this exercise until all your credit cards are paid off. Once that happens, use the cards only for emergencies and make sure to pay off the balance in full each month.

Set up an emergency fund

An emergency fund is a necessary part of any well built financial plan. Financial emergencies can come in the form of a job loss, home or auto repairs among other things. When this occurs you don’t want to be forced to rely on credit cards or a loan which could simply compound the problem. Most experts recommend that an emergency fund should contain three to six months worth of expenses.

Calculating how much you should have in an emergency fund is simple as long as you completed your first goal of setting up a budget. If there are two working spouses at home or one spouse with an additional source of income, three months worth is usually acceptable. However, if only one spouse is working and that is the only source of income, you want to strive for six months worth. This money should be kept liquid and safe. That is, in a savings account or short term investment instrument ie, CD, bank savings account, repurchase agreement. The focus here is not so much the growth of your investment, but rather the availability and accessibility of your funds in case of the unexpected.

Save for retirement

Now that you have followed the plan, gotten out of debt and have put some money aside for the unexpected, it’s time to get serious about your retirement. No longer can you rely on an employer pension and National Social Security to provide for a comfortable retirement. It is up to you to save and invest prudently to ensure your retirement years will be “golden”. Your (retirement) savings target should be a minimum of 15% of your gross annual income. However, if you are close to retirement and have not accumulated enough over the years or have seen a significant reduction in your current portfolio you will need to aggressively ramp up your savings.

There are a multitude of options available to save for retirement. There are employer sponsored plans as well as individual plans available through various institutions as well as investments through the stock or bond market. It is advisable if possible to match your employer’s contribution as this gives you an added tax benefit and more of your salary will go towards your retirement savings.

Whether you are investing in an employer sponsored plan or an Individual Retirement Scheme (IRA), you want to ensure that you diversify your portfolio. A diversified asset allocation will provide you with a less volatile portfolio that takes advantage of the growth potential across all asset classes.

If 15% of annual gross income is currently unattainable, don’t panic. Saving even 5% can make a significant difference. As your economic situation gets better, you can always increase your voluntary contribution. Having more money than you need during retirement is a “problem” we should all aspire to have.

No longer can we spend more than we make, rack up credit cards, and save next to nothing for retirement. Use the experiences of the past as the catalyst to re-examine our financial situation and take the steps to improve upon it.

Our financial advisors are here to offer any assistance you may need to get you on the path to financial success.Contact us today for your personal financial counseling and let us help you to get back to basics.