How you should handle card debt during economic turmoil
By Alan Klayman
Maturing Loans
Alan Klayman is CEO of Klayman Financial LLC. He served as a vice president at Fidelity Investments, worked as a financial planner for American Express, and built fixed income strategies on Wall Street at The First Boston Corporation. At CreditCards.com, he writes Maturing Loans, a weekly feature in which he answers readers' questions about retirement and debt issues.
Dear Maturing Loans,
How does the recent turmoil in the markets change the way I am paying off my credit cards and making investments? -- Steve
Dear Steve,
You've asked a timely question as in the past week or so, there have been unprecedented changes in the U.S. financial system. We have seen some Wall Street giants change owners, go out of business and sell off entire divisions. Meanwhile, the government has stepped in to shore up several areas of our finance, banking and credit markets. One thing we can be sure of is that over time, things change. Some changes happen fast and more dramatically than others. As we have witnessed drastic change occur in other sectors of our national fabric, eventually we end up stronger for correcting mistakes made in the past.
So, let's answer your question and talk about what all this change means to you.
Continue to pay off your credit cards in a timely manner. If you are paying them off in full each month, continue to do so. If you are making payments to reduce your credit card balance, it's wise to continue on that road as well. This is certainly not the time to start making purchases you cannot afford. Don't overextend yourself, but don't stop living, either. Just because the news headlines are threatening doesn't mean that you shouldn't continue doing what you have been doing (as long as you're not carelessly running up your credit card balance!). It just means you should check your budget, make smart purchases, and use your credit wisely. Use low interest and rewards cards to enhance your use of credit and make your money go further.
Also, remember the government does insure your bank deposits through the FDIC. The basic insurance amount is $100,000 per depositor per insured bank, except for certain retirement accounts, which are insured up to $250,000 per owner per insured bank.
From an investment standpoint, if you are trying to grow money, you should use these recent events not as a time to make drastic changes, but as a time to watch your investment portfolio closely. Asset allocation, the percentage of investment money you have in stocks, bonds and cash should be reviewed by a financial professional. Make sure you are on track for your short- (0-4 years), intermediate- (5-10 years), and long-term (10 years-plus) goals, as well as taking the appropriate amount of risk.
Long-term investing should call for a disciplined approach, using time-honored methods such as dollar cost averaging (putting the same amount of money into investments every month), which can help mitigate some of the effects of market volatility over a long period of time. Also look to keep your expenses down in your investments. Sometimes similar investments (like mutual funds) may have much different cost structures. By saving on the costs of your investments, just like lowering your credit card interest rates, you can put more money in your pocket.
If you are using investments for your retirement income, you should be careful about taking income from fluctuating investments. As you may have seen, taking income from investments that go up and down is unpredictable, and in some cases, can be costly. Now is the time to create an income plan to take advantage of fixed investments, stabilize your income, and find the income strategy that works best for you.
Thanks for the question, see you back here next week.
Alan Klayman is creator of MyIncomeStrategy.com and CEO of Klayman Financial LLC. Klayman specializes in retirement income planning, business management and planning, estate planning, tax-advantaged investing, trust investment management, professional money management, insurance and annuities, mutual funds, fixed income securities, and institutional and personal retirement plan administration.
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