The Market Update

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Buy Less, Save More, Calm Down

Lauren Tara LaCapra

Home values are declining, the stock market is volatile, returns on "safe" investments barely beat inflation, and employers are cutting jobs by the thousands. Lenders have tightened standards in the risk-averse market, making it much harder to take on new debt -- or even hang onto the existing level of home-equity lines.

The average American household's net worth fell by just over $15,000 during the first three months of the year due to plunging home values and a turbulent stock market, according to data released by the Federal Reserve last week. The cumulative effect was a $1.7 trillion decline in wealth, which doesn't factor in further economic woes in the second quarter.

With the dollar still weak, it also promises to be a costly summer. Cooling a home, traveling abroad, driving to work or simply buying groceries has become more expensive. U.S. gasoline prices hit a new record over $4 per gallon on Monday, on average, according to the AAA and Oil Price Information Service. High fuel costs are following oil's surge, which hit an all-time high of $139 per barrel last week.

Still, there's hope for those who follow three key pieces of advice: Buy less, save more and calm down.

Vincent Barbera, a director of financial planning at TGS Financial Advisors, notes that although home equity has reached a level below 50% for the first time on record, it has been declining for years -- even through the height of the housing boom. He advises clients to look at things in broader terms and weather the storm by limiting discretionary purchases and socking away savings.

From "a historical perspective," says Barbera, the current downturn "is not as significant as you think it is. You're just feeling it because you're living in the moment."

Barbera advises clients to not be flustered by daily fluctuations in the market, even ones like the 400-point drop in the Dow Jones Industrial Average on Friday. While there's no guarantee of a rebound, cashing out positions because of short-term jitters often does more harm than good, according to Barbera.

"Did we receive any calls from clients?" he says. "No, absolutely not. We kind of have them trained to not look at the micro things."

Loreine Smith, founder of Dallas-based financial planning firm Life Plan Strategies, says it's important to have at least six months' worth of living expenses saved to provide some flexibility in case of a job loss. She adds that those who have less steady jobs, such as the self-employed or freelancers, might want to save a year's worth.

Smith also tells clients to maintain "a little bit of exposure to a lot of things" with their portfolios - balancing out riskier, high-growth investments with safe, stable ones. But once an investment strategy is reached, she also warns against pulling out too hastily when the market gyrates.

"I advise some of my clients to take their statement and put it in the drawer," she says, "so they don't become focused on the fact that it had a bad week or it had a bad day."

Greg Womack, head of Womack Investment Advisers, tells clients to cut back, save up and deleverage, starting with high-interest debt like credit cards or auto loans. Every little bit counts: Just dining at home, carpooling and conserving electricity use can save thousands of dollars a year, never mind the big-ticket discretionary purchases like iPhones, flat-panel TVs and designer handbags.

"There's nothing we can do about the slowing economy but there's lots of things we can do to mitigate the effects," he says. "When things are good, you spend on things you don't really need but want to have. Now you have to tighten the belt and trim the fat to be prepared for when things do turn around."