NurseWeek: Breathing lessons

Shape up your savings
Financial advisers help stretch your bucks, plan your fiscal future

By Tom Gray
January 8, 2001
Photo: Artville

Financial planners suggest that you try to set aside 10 percent of your gross income for retirement through your employers' tax-deferred savings plans, such as 401 (k)s and 403(b)s.


	You've read the article. Now tell us what you think. Getting started (with some help from the Web) The Internet cannot foretell the future, but it can do a lot to help you figure out your future financial needs and craft a strategy for meeting them. These Web sites may be useful for financial planning and investment research: FinanCenter.com This site has a host of calculators that you can use to answer financial planning questions such as, "When can I retire?" "How much should be saved for college?" and "What’s the best type of IRA?" Click the "Investing" or "Planning" tabs on the home page to see your choices. The Bloomberg Web site (www.bloomberg.com) also has calculators for retirement as well as 401 (k)s and mortgages. Click "Retirement" in the links under "Money" at the home page. SavingForCollege.com This is a guide to so-called "529 plans," which states have set up to help you save and invest for college. These are tax-deferred plans that, unlike custodial plans, allow parents to keep control once children reach college age. An added bonus: Withdrawals are taxed at the student’s rate, and you’re not limited to the plan of your home state. National Association of Personal Financial Advisors This is the place to go if you want to find a fee-only planner. Click the link "Find a Fee-Only Planner Near You" and follow the instructions to get a list. Because these planners do not make money on commissions for mutual funds, stocks insurance policies or other products, they can make a strong claim to being objective in their advice. The downside for the less-than-rich is that planners’ fees can be steep. Look for planners on the NAPFA list who say they focus on middle-income clients. MSN MoneyCentral This is one of many – and one of the best – personal finance sites on the Web. Click the "Spending and Saving" link for articles and tips on budgeting. Click "Investor" for research and news on stocks, bonds and mutual funds, along with advice for investors from novice to advanced. Here you’ll find an investing tutorial that includes a test of your risk tolerance. Click "Insight" at the Investor page, then "Step-by-Step Guides." Among other full-featured personal finance sites worth a look are Quicken.com and Yahoo! Personal finance. Morningstar If you want to learn more about mutual funds and find out which funds are right for you, this should be your first stop. Morningstar analyzes and rates thousands of funds, as well as stocks, and its screening tools let you search for funds by criteria including fund performance, expenses, types of assets, ratings and other factors. Click "Funds" on the home page. "Fund Quickrank" and "Fund Selector" are the two simple screens to use. Morningstar also has a calculator, at the "Goal Planner" link, with which you can figure what you’ll need to save and invest to reach your financial objectives. ~ Tom Gray

One thing you can count on this new year: Millions of people will hope to end 2001 a little richer and a little thinner. These two goals have quite a bit in common: Attaining both requires patience and discipline. Just as it takes consistent exercise to get your body in shape, it takes consistent saving coupled with prudent investing to beef up your finances.

Saving more
The trick is to pay yourself first – even before you pay the tax man – and make those payments automatic. Most working Americans can do this by signing up for their employers’ tax-deferred savings plans, such as 401(k)s and 403(b)s.

Financial planners who specialize in helping middle-income clients suggest that you try to set aside 10 percent of your gross income for retirement in this way. In any event, they say, take full advantage of any matching funds your employer may throw into your plan.

If an employer offers a 50 percent match for contributions up to 5 percent, you can instantly turn your 5 percent into 7.5 percent. This automatic 50 percent return on your money – tax-deferred to boot – is nothing to sniff at. "You just can’t get those kinds of returns in the [stock] market," said Stewart Farnell, a fee-only financial planner^* in Boulder, Colo. "That’s a very lucrative investment ... that novices should take advantage of."

You can take the autopilot method of saving further by setting up automatic withdrawals from your checking account. You can ask a bank, brokerage or mutual fund group to take out this money regularly and invest it. With banks, you might choose insured money market accounts, which pay higher interest than savings accounts. With a brokerage or fund group, you might specify a mix of mutual funds.

How much should you set aside? That’s a question you have to answer for yourself, in light of your age, financial goals, your net worth and your sources of income.

One goal that makes sense for everyone, experts say, is a "rainy day" fund. This is a store of ready cash, in a liquid investment such as a money market fund that you can draw on in emergencies, such as a job loss. A common rule of thumb is to set aside three to six months of your living expenses in this way. Exactly how much depends on how secure your income is. A two-income family would probably not need as big a cushion as a single parent.

Once you’ve built up your emergency fund, you can build up an investment portfolio aimed at reaching short- and medium-term goals, such as the down payment on your home and college for the kids. "Think of your emergency reserve as a bucket," said financial planner Judy Ann Stewart of Carlsbad, Calif. "Once [the money] starts spilling over, you can invest it."

Spending (and borrowing) less
Let’s backtrack a bit. The advice to set aside some money regularly assumes you aren’t spending every penny you take in or, even worse, living beyond your means. You may be held back from saving by steep monthly payments on consumer debt such as credit cards. In that case, experts have loud and clear advice: Pay it off. "If you have credit cards running in the 18 percent to 20 percent range," said Naomi Scrivener, a financial planner in Georgetown, Texas, "I’d say ASAP do what you have to do" to pay them off. Hold a garage sale if you have to, she said.

Mortgage debt is a different matter. Planners encourage clients to buy a home if they haven’t already done so, as long as they don’t borrow so much that they become slaves to the mortgage payments (and remember, mortgage interest is tax-deductible).

If you’re free of credit card debt and you still can’t salt any money away, you have to figure out why you’re spending too much. Keeping a record of your outlays and dividing them into categories (groceries, clothing, car costs, restaurant meals, etc.) is helpful.

Pat Jennerjohn, an Oakland, Calif., financial planner, suggests trying to go two months using cash for most of your payments except the few, such as mortgage and insurance, that must be paid by check. The routine can be an eye-opener, she said. "You go to Starbucks and whip out that 5-dollar bill and ask, ‘Do I really want to spend this?’ After going on this two-month all-cash program, it’s like hitting the reset button."

Investing wisely
As soon as you set up your tax-deferred account at work, you’ll be asked to make some investment decisions. Typically, 401(k)s and other such plans offer a choice of mutual funds – pools of stocks, bonds and/or short-term money market debt. You can choose just one of these or spread your money among several.

The rules you follow in making these choices are the same ones you’ll be following the rest of your life.

The first and most important point to remember is that risk and return always are inversely related. The higher the return, the greater your chance of losing money.

That’s why ultra-safe investments such as Treasury bills, which the U.S. government uses to borrow money for less than a year, usually have the lowest interest rates. High-grade corporate bonds from solid companies with long and spotless records of repaying debt, pay less than junk bonds from companies with riskier prospects.

Among stock mutual funds, those that invest in fast-growing technology companies can double in a good year (such as 1999) and dive in the next. Less volatile are the so-called index funds, which buy a broad mix of stocks to imitate market indexes such as the S&P (Standard & Poor’s) 500.

The other cardinal rule is to choose a balance of risk and return based on your own situation, factoring in your age, income and financial goals.

In general, the younger you are, the more risk you can take in your retirement portfolio. Over long periods – 20 years or more – stocks almost always outperform bonds and money market funds. (Historically, the after-inflation return on stocks is a shade more than 10 percent per year). But for nearer-term expenses, you want to make sure the money will be there. This is where you use bond funds and, for the shortest-term needs, money market funds.

What about buying individual stocks? Unless you have several hundred thousand dollars to invest, planners say it’s hard to buy enough different stocks to spread your risks properly.

To all of these general guidelines you need to consider one all-important factor: your own tolerance for risk. Don’t invest in anything that keeps you awake at night.

^*- All planners quoted are "fee-only." That is, they earn strictly from the fees paid to them by clients, and earn no commissions on financial products they advise you to buy.