Protecting your investments during the debt ceiling debate

 by Jim Sloan

The Congressional debate over the debt ceiling may have been resolved by the time you read this. But the dire warnings about how a loan default would affect the United States and those of us who make investments in the U.S. are still ringing in our ears.

When you are carrying a $14.3 trillion debt that is only getting larger, even when you're a country as rich as the U.S., people have got to wonder about your ability to pay your bills. And when your politicians seem willing to play chicken with your country's credit rating and global financial reputation, doubts about your financial future grow deeper.

So the question that lingers is this: How will those of us with retirement savings accounts, mortgages, money market accounts and other investments be affected by this ongoing debt crisis?

Unfortunately, there are no definitive answers. While people like Wall Street analyst Dick Bove recommended that people get liquid and stop making stock market investments altogether, other fiscal experts were telling NPR and other media outlets to stay the course. When average investors try to anticipate what the stock market or interest rates will do, they usually guess wrong and wind up losing more than if they'd stayed pat.

That said, here are some ways the debt debate and prospects for default could affect you:

Interest rates on mortgages go up

According to CBS News, interest rates on a 30-year fixed mortgage could go up as much as 2 percentage points from 4.5 percent if the U.S. defaults. Adjustable rate mortgages owned by 15 million U.S. homeowners could also increase.

Other estimates were that interest rates on mortgages could rise a half point, meaning the average home loan of $172,000 could increase nearly $20,000.

401(k) retirement savings accounts decrease in value

A 10 percent drop in the stock market means the average 401(k) savings account of $140,000 could lose about $9,000, NPR said. Investors can avoid these potential losses by taking Bove's advice, but experts told NPR that people with diversified portfolios with a mix of growth stocks and conservative investments should be able to weather this blip.

According to Forbes.com, those who get out of the stock market to cut their losses don't do as well as those who stay the course. For instance, those who stayed in the market from 1988 to 2008 earned an annual return of 8.43 percent while those who pulled out of stocks and missed key market upticks came away with 0.59 percent annual growth.

Putting a halt to savings

So if these repercussions don't sound that dire, why are politicians making it sound like the U.S. is on the brink of financial disaster?

According to the Chicago Tribune, that's just politicians using negotiating tactics; those who can dream up the most outlandish consequences gain an upper hand in the negotiations.

What seems lost on politicians is the fact that all this uncertainty is causing more anxiety and expense than a simple tax hike would. According to the Washington Post, many executives--the job creators the Republicans purport to protect--said they could tolerate a tax hike if it were part of a clear, predictable fiscal policy.

7 steps to an emergency savings account

by Jim Sloan

The secret to saving: Pay yourself first

With many Americans struggling to pay the bills, cut down their credit card debt or get by on a smaller salary, it may seem foolish to advocate putting money into personal savings accounts. Isn't a savings account something you should think about when you're flush with cash?

Not in these uncertain times.

Saving accounts for emergencies

According to The Sacramento Bee newspaper, more than a third of us are putting less money into our savings accounts, online savings account or money market account now than we were a year ago. More than half of us are pessimistic about the economy turning around.

But perhaps the most surprising statistic: Only one in four Americans has saved enough in their savings accounts--be it a high-yield savings account or an online savings account--to cover their household living expenses for six months. These so-called rainy day funds or emergency accounts are critical during a time of high unemployment and economic insecurity.

7 steps to short-term security

That's why it's important for all of us to start building the best savings accounts we've ever had. Here are some tips:

  1. Start, even if it means starting small. Even setting aside $10 a week into your online savings account helps you in the long run. Make it a habit and stick to it.
  2. Focus on a goal and work to reach it. One goal would be to figure out what six months of living costs you--figure in grocery bills, rent or mortgage, insurance, utilities and everything else and come up with a figure. That's your goal. Work toward it.
  3. Set aside 10 percent of your monthly salary for your emergency savings accounts. In a year, you'll have more than enough for a few month's worth of living expenses.
  4. Treat saving like any other financial responsibility. It's a bill. Pay it. Make it the first bill you pay and then pay the remainder.
  5. Save automatically. When you set up direct deposit for your paycheck have a portion automatically diverted to your savings account. Most direct deposit forms allow you to do set up several transactions each time you get paid, so set up at least this one. Once you don't have to think about it, it takes care of itself.
  6. Find a "money buddy" who you can confide in and share success with. Your money buddy has to approve any transfers from your savings accounts, so give them online access to your accounts. Everyone works harder when they think someone is watching them.
  7. Log any windfalls. Windfalls are trees that have blown over and they save pioneers money and time because they didn't have to chop them down. Put all your cord-wood - including bonuses, gifts or over unexpected dividends.--into your emergency savings accounts.

That should get you started improving your savings rate. If you need additional strategies for starting the best savings accounts, consider freezing your credit cards in a Ziploc baggie filled with water--the time it takes to defrost it might be just the cooling off period you need to reconsider the expense--or paying for everything with cash. People who buy with cash tend to spend less than those charging their credit cards.

6 ways to get the most from your 401(k) retirement savings account

by Jim Sloan

Although investment advice firm Charles Schwab reports that 401(k) plans have replaced workplace pensions as most Americans' largest source of retirement savings, most workers aren't giving their 401(k) investments the attention these savings accounts are owed.

For one thing, almost a third of American workers with access to 401(k) savings accounts through their employer don't take advantage of them. And those who are saving aren't taking advantage of the type of professional advice that has helped others not only increase their savings but to weather stormy stock market periods.

With all that in mind, here are six key ways to get the most out of your 401(k) retirement accounts:

  1. Keep track of your old 401(k) accounts. With more workers changing jobs and careers these days than in the past, when many Americans worked for the same company their entire professional lives, it's easy for you to find yourself with more than one retirement savings account. So consider moving an old account into your new employer's 401(k) plan, or rolling it over into an Individual Retirement Account (IRA). The last thing you want to do is cash it in; you not only lose future income on the investment, but you also will have to pay taxes and penalties if you're younger than retirement age.
  2. Invest in retirement in accounts outside of your 401(k). This diversified approach increases your choices from the often-limited investment options allowed under most 401(k) plans. It's easy to shop around for the best CD rates, and if a certificate of deposit doesn't interest you--the highest CD rates are currently at a low level--then consider online savings or some other high interest savings account.
  3. Be proactive about signing up for your company's 401(k) program. Although nearly 40 percent of employers automatically enroll their workers in their 401(k) plans, most still require that you take steps to set up an account.
  4. Maximize the match. Although company matching policies are sometimes confusing, find out what the maximum amount is that your company will match and contribute at least that amount. The match is free money, so take it. This may seem like obvious advice, but according to Smartmoney.com, three out of 10 workers eligible for a company 401(k) plan don't participate.
  5. Diversify your investments within your 401(k). We've all learned in recent years just how volatile the stock market is. Although the average annual return of stocks in the long term is roughly 7 percent, there can be wild fluctuations in between. So make sure some of your investments are held in less risky assets, such as bonds.
  6. Get some professional advice. According to a 2010 Charles Schwab study, the number of employers who make 401(k) advice available to plan participants has increased from 42 percent in 2005 to 74 percent in 2010. According to Schwab, 70 percent of those who receive 401(k) advice double their savings rate; double the number of asset classes they invest in; and show more discipline when it comes to riding out market fluctuations and remaining in a market when it rebounds. The problem is that although most people say they would use free personal advice if it were offered to them, less than 10 percent actually do. Some are getting advice outside the workplace but others say they are too busy with other financial challenges or haven't saved enough to warrant an appointment with a financial adviser.

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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