by Ginita Wall, Finances for Women Expert (see more from this contributor)
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The longest peacetime expansion in recent U.S. history began in 1983. For nearly 20 years we've become accustomed to positive developments in our economy: a growing number of jobs, a stronger employment rate and rapidly rising stock prices.
But the times they have been a-changin'. Now the news is more likely to be about slowdowns, layoffs and slumping stock market indexes.
So how do you think about all this when it comes to your personal finances, and particularly your savingsand retirement plans?
Well, first of all, stay calm. This cooling off of the economy doesn't mean the end of U.S. prosperity. But it does mean that a bit more pressure is being put on all of who share this economy.
To take care of yourself, make sure you are taking these three steps.
Step One: Budget
You really need to face the dreaded "B" word: budget . It cannot be said often enough that you need to live within your means. Being a debtor means being a slave, working to pay the interest on someone else's investment. And if your income should drop because of a layoff at work, that debt will really be a noose around your neck. So use this downturn as a wakeup call -- and the low interest rates as an opportunity -- to get your financial house in order. Craft a budget and stick to it, refinance your mortgage to take advantage of lower interest rates , and sock away funds for your future.
Step Two: Don't Sell Now
Hang on to retirement holdings and other investments unless you absolutely need the money right now. When stocks are low is not the time to unload: Buy high, sell low is not a formula that ever made anyone rich. Hold onto any stock that is not absolute junk. Quality stocks that are beaten down to 40 percent of their previous value are likely to rise again when the entire market rises. If the original reason you bought the stock still exists, keep it.
Step Three: Look for Buying Opportunities
In stocks, look for well-known companies with solid financial strength that have been beaten down by the troubles that have befallen the rest of their industry. Peter Lynch's famous investment classic, One Up on Wall Street, is full of stories of successful stock purchases of this kind.
The present downturn does not have to wreck your financial plans. Use this crisis to go back to basics, take stock of your situation, and hone the fundamentals of your financial life.
Step Four: Be Aware
If the slump in your personal portfolio is really getting you down, try to educate yourself and be aware of what's going on with this softening of the stock market.
The stock market is not a magical place where wealth is created out of bits and bytes and shuffled paper. Stocks are investments in companies that must produce useful products and services. If corporate sales and profits don't grow at 20 percent year after year, we can't expect the stock market to sustain a 20 percent growth rate.
When stock prices rise faster than companies are creating real wealth, then the price of stocks will eventually stall out and fall back to meet their actual value.
That is what started happening in 2000. Although we are not officially in a "bear market" (or a market that has fallen more than 20 percent), the 2000 drop of nearly 10 percent for the S&P 500 index has given investors pause, especially as the markets have dropped a bit more in 2001. Whether further market drops put us officially into bear territory or whether this is a lesser downturn remains to be seen. Fortunately, most bear markets last only a year or two, whereas the periods of prosperity last much longer.
Right now, the economy is cooling as growth of
productivity -- or the ability of people and machines to produce
goods at a faster rate -- is beginning to slow. No one knows how
long this trend will last. Many factors, including adjustments to
the tax code, interest-rate changes and even popular expectations
known as "consumer confidence" affect the length of time
needed for a full recovery. Our prosperity depends greatly on how
the government, industry and individuals handle their finances in
the coming years.
How do you weather the economy's ups and downs? For
more budgeting tips see here.
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