Forget the portfolio for a second. Pocketbook concerns are on the rise as people lose their jobs and confront an uncertain economic future. From the recently laid off to the would-be retiree, a lot of folks out there are feeling overwhelmed by their finances and have no idea what to do.
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This is where Richard Bloom comes in. Mr. Bloom is the head of Bloom Asset Management in Farmington Hills, Mich., a daily personal finance columnist for
The Detroit News
and also was the host of the "Money Talk" question-and-answer radio show for 16 years. We sat down with Mr. Bloom and presented him with a variety of all-too-common scenarios. He gave us advice and ways to make things better.
His strongest piece of advice? Put a padlock on the pocketbook and tighten that belt. Many people just have no idea how much they're spending. Unless people can control what's going out of their wallet, they'll never keep anything in it.
TheStreet.com: Let's just say I got laid off. In addition to some severance, I get unemployment, but I don't have any benefits. Aside from $1,000 in stock and a few hundred in a 401(k) plan, I don't have any savings to speak of. My credit card bill is $3,000 and the employment situation isn't looking good. At this rate, existing on unemployment and whatever work I can find, I can almost get by. Aside from finding a job, what is the first thing I should do financially?
Richard Bloom: I'd make a cash-flow statement. Make a list and cut expenses. Most people, if you ask them, don't have any idea what it costs for them to live a month. I know I have someone in and they say, "Well, it costs me $1,500 a month for me to live." And I look at them and I say, "Your mortgage payment on your house is $1,200. How's it cost you only $1,500 to live? Don't you eat?"
And I find that people don't have a good handle on their expenses. People need to sit down and put the old pencil to paper and figure out what it costs to live each month, and once they know where the money is going then it's much easier to say, OK, this is where I can cut back and make adjustments.
And this person in this scenario has a lot of credit card bills, so we want to look at where we can lower the interest rate on those charge cards. We all get those deals in the mail. And they're on the Internet. We need to be a little proactive to find a better rate.
You're also going to need some health insurance in that situation. Illness can really put you over the edge financially. I'd be exploring COBRA through your old employer. You can also try to find some organizations that you can piggyback on at least to buy some sort of catastrophic coverage.
TSC: What should I do with the severance?
I would not invest it at this point in time. Being unemployed, you want to keep your resources liquid. I'm a believer that when you're talking about investing in the stock market, you're looking long-term. Here, being laid off, you're going to have some short-term issues so I would rather keep that cash sort of liquid to cover expenses.
TSC: What about the stock and 401(k)? Should I cash those out?
I would directly transfer the 401(k) plan into an IRA, because I believe to take it out and to pay the taxes and penalties wouldn't be worth it, and you need to always think about your retirement. Another thing I would look at is that if unemployment is going to last a long time -- say maybe a whole year -- somewhere during that time period you may also want to think about a Roth conversion. You may be able to transfer that IRA into a Roth IRA at a very low cost
since your tax rate will be low, and then that money grows from there on out tax free instead of tax deferred.
TSC: Let's take a much different scenario. Let's say I'm 62 years old, three years from retirement, where I'll receive both my Social Security and pension benefits. Combined, they'll give me about $30,000 a year, which is enough to live on, but not enough to keep me and my spouse in the lifestyle we've been accustomed to. I have a 401(k), but because of the stock market, that's been clipped from $100,000 to $50,000. I do, however, own my home, which is worth $200,000. Still, I won't be getting health care benefits in three years and I feel like I don't have enough money to live on. How should I fix this? Is three years enough time?
I think three years is enough time to move that $50,000 but not enough time to get back to the full $100,000. I think that's being unrealistic. I think three years does give you sufficient time to have some of the money invested in the stock market.
And again, what I would take a step back on is to see where I can cut back on my living expenses. Someone who is 62, they don't just have to worry about what to do the next three years, they have to worry about what to do for the next 30 or 35 years. And to do that, you need a rising income. You can't live on a shrinking income or a fixed income on retirement anymore. And that's one of the things that retirees don't take into consideration.
They think that when they hit their mid-70s that the needs will go down and that's just not the case. Look at new things like the Internet. I mean, 10 years ago, I had no idea what the Internet was and now I have a monthly bill and I don't consider that luxury. I consider that just a normal part of American life.
So with that $50,000 and the 401(k) plan, you need money invested in the long run so that you can have a rising income throughout your lifetime. I'm a big believer that people have to get a realistic hold on their expenses. You don't want 20 years from now for the person to run out of money because someone in their 80s isn't
considered that old anymore.
TSC: Let's just say I'm one of those people who can't get their costs under control. I've got $10,000 in credit card bills on like, eight cards. And now we're headed into this Christmas season and I just know I'm going to spend too much money. I just feel overwhelmed by the amount of money I owe and now that we're hitting a recession, man, I just don't think I'll ever get it under control. Where do I even start?
There are a couple things. There are a lot of nonprofit credit companies these days. They have relationships with the credit card companies and can work out some payment plans to work out a new interest rate and make the payments easier for you.
And I believe this is the time of year where people have to remember that the holidays aren't about giving the most expensive gift. I think that our society teaches people that, but that's not what the holidays should be. People need to have the maturity to say, "You know what? I can't afford something and I'm not going to buy it. I can do other things."
I believe that when someone has that much in credit card debt, they need to get on a program to reduce it. Either through one of these nonprofit credit companies, or they can do it themselves. Look at switching that charge card balance to a low-interest credit card. The Internet has all sorts of deals. And most people get these cards in the mail on an almost weekly basis.
We have to have that person take advantage of those deals. And then, with the lower interest rate, the more they pay, the more it reduces principle.
TSC: Most people have thousands in credit card debt. Should health benefits like COBRA, which can cost up to $400 a month, be a top priority or a lesser concern when compared to credit card debt? Which is more important?
You gotta' go with the health care benefits. That's because in a worst-case scenario, someone can go into bankruptcy over their charge card debt. And they can get those discharged in bankruptcy. Health care is a different issue. I would rather have those health care benefits, because if you have to go through a Chapter 7, that's just what has to happen.
TSC: Let's just say I've got a job, but fear that I'll be laid off soon. The money I make is more than enough to keep my living expenses under control, but still, it could run out at any time. Considering that I'll be getting unemployment, but not health benefits, if I get sacked, what can I do now to hedge against future disaster?
I think that everyone needs an emergency fund of money. Anywhere from three to six months of living expenses. And they need to keep that liquid in short-term bond funds or money market accounts. So that if someone does lose their job they're not forced to immediately rush out and take any job -- they have time to look.
Three to six months, and in this market, six months makes sense because it gives someone time to get back on their feet and find the right job. One thing people do when they lose their job is that they panic and they take the first job that they're offered and that might not be the best thing going. I think that even before people start investing their money they want to establish an emergency fund of money.