Stash some cash and stay alert to ride
the waves if an economic storm hits
By Laura A. Bruce • Bankrate.com^SM

July 20, 2000 -- Where do you start when you want to build financial muscle to withstand the perfect financial storm? With savings and liquidity -- the ability to meet obligations without using fixed assets.

In other words, you don't want to have to tap into your investments or, worse, a retirement account, if you lose your job and miss several paychecks.

Chris Cooper, a certified financial planner based in Toledo, Ohio, says to make liquidity part of your budget and forget about trying to pay down debt too fast.

"People say, 'I read an article that says I can make 18 percent just by paying off my credit card.' If you knew what the interest rate was in the first place you wouldn't have run the thing up in the first place. Liquidity is king when you have a downturn."

Three-month supply
The rule of thumb is have at least three months' living expenses on hand and if you can sock away enough for six months, all the better. If you can't stand putting money in the bank because interest rates are absurd, try putting three months' expenses in the bank and the remainder in a three-month certificate of deposit -- which you should keep rolling over until you really need it.

Stephen Barnes, CFP at Barnes Investment Advisory in Phoenix, says it's essential to stick to the three-month safety net rule, but he is a proponent of paying off debt as fast as possible.

"I'd agree savings should come first if we're talking about foregoing putting money in a company matched 401(k). But if we're talking about a savings or brokerage account, I can't think of an instance where you wouldn't be better off paying debt."

Three steps toward stability
Barnes has three steps he says people should take to achieve financial stability.

"I think there's a lot of complacency about investment portfolios," says Barnes. "This is an excellent time, last March would have been better, but this is the second-best time to go through your portfolio and double check that you're not overexposed to individual companies or sectors. Have a prudently diverse portfolio.

"Review your personal income statement. Make sure expenses and savings are in line with long-term objectives. Don't be complacent with income and expenses. Eliminate debt while things are still good. I've never seen people eliminate debt too rapidly.

"Have sufficient liquidity -- emergency reserve to tap in case of a financial reversal. Three to six months living expenses. There's always something that gets in the way -- books for school or Johnny needs clothes for school. Look at what's in the way of building that reserve. Make an exception once and you'll make an exception a million times."

Barnes isn't suggesting you don't buy your kid's schoolbooks or make him walk around in pants three inches above his ankles, but he does say to build those emergency savings and don't touch them for anything other than emergencies.

Keep your eye on the job market
Cooper suggests sizing up your career track.

"If we have a downturn such as there was several years ago when many companies began downsizing, a lot of people lost their jobs for a reason -- their jobs were obsolete, their skills were obsolete," says Cooper. "Ask yourself, 'Am I acquiring new skills, keeping up with the latest trends? Should I get an MBA, should I get a college degree?' The more dependent you are on doing one type of job, the more likely you are to lose that job."

Another thing to keep in mind is the baby boom generation is aging, and smaller families are coming up behind them. Take that into consideration when buying a house.

"We all get into this more, more, more idea -- bigger houses, bigger cars," says Cooper. "Gas goes up and we say, 'wow.' It's the same with houses. Who's going to buy these bigger houses from you in the future? Give consideration to overbuilding real estate and putting too much money into a house. There will be an awful lot of $400,000 houses 20 years from now with no one to buy them."

"There are plenty of competent financial planners who will work with smaller portfolios," he says. "But you have to turn over a lot of rocks before finding the one that's right for you. You have to be able to develop a rapport with that person and buy into what they're saying. It's much more important to find someone with whom you have good rapport than someone with tremendous technical expertise -- that's secondary."

And what if you can't afford a financial planner?

"Do this," says Barnes. "Spend less than you make."

-- Posted: July 20, 2000