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Personal Finance: 20 Dos & Don'ts for 2009

Personal Finance: 20 Dos & Don'ts for 2009

Business Week

11. Do track your spending.

“It’s very easy to lose sight of where your funds are spent,” says Alexandra Ollinger of Truepoint Capital in Cincinnati.

G.M. Livingston III, a planner in Santa Rosa Beach, Fla., advises clients to buy software like Quicken to track their spending. “It’s a universal mistake,” Livingston says. “Most people don’t know where their money goes.”

12. Don’t pay high management fees.

It doesn’t only matter how much your investments earn; it is also important how much you get to keep after trading costs and fees paid to financial advisers and fund managers. When market returns are small or nonexistent, even a 1% or 2% management fee can hurt. Decide if it’s worth it. Also, check out offerings from traditionally low-cost fund companies like Vanguard, where the average mutual fund expense ratio is 0.2%.

13. Do review your credit reports.

With the Federal Reserve cutting the federal funds rate close to zero and policymakers eager to revive the housing market, mortgage rates are expected to drop substantially in 2009. That could be a great opportunity to refinance your mortgage, but only if you have a solid credit score. Check your credit report for any errors now, says Scott Beaudin of Pathway Financial Advisors in Burlington, Vt. “Fixing problems takes time and you don’t want to be trying to fix your report while in the middle of a mortgage application,” he says. The three U.S. consumer reporting agencies set up a Web site, to allow consumers to access a free copy of their credit report each year.

14. Don’t follow the herd.

“Be fearful when others are greedy, and be greedy when others are fearful,” says legendary investor Warren Buffett. Warren Ward, an adviser in Columbus, Ind., agrees, advising his clients to ease back into stock or bond markets rather than seeking the safety of cash or Treasuries as many other investors are doing now. “Do your own thinking and don’t allow yourself to be panicked into taking an action you’ll regret,” Ward says.

15. Do write down an investing plan and budget, and stick to them.

A budget can help control spending and boost the amount of money you save each month. An investing plan takes the emotion out of your investing decision. “Investing systematically [is] especially [important] during market downturns,” Ward says.

16. Don’t forgo necessary insurance.

You can save some money by increasing your car insurance deductible or forgoing life, disability or home insurance, but you could also be left penniless after a serious emergency. Full coverage isn’t always necessary, but make sure you’re protected in a worst-case scenario.

17. Do check out your financial adviser.

The arrest of Bernard Madoff, who saw his $50 billion hedge fund collapse in an alleged Ponzi scheme, shows the danger of relying on one person—whether a fund manager or a financial planner and adviser—to handle your nest egg.

Don’t just pick a broker or planner out of the yellow pages. “Do your homework,” says Eileen Freiburger of ESF Financial Planning Group in Manhattan Beach, Calif. Ask advisers about their qualifications, certifications, and educations, as well as their fees, ethics and disclosure policies. Look them up in online databases that track complaints against planners. The Financial Industry Regulatory Authority’s BrokerCheck is a good place to start.

18. Don’t invest in anything you don’t understand.

This financial crisis has demonstrated the dangers of too much complexity in the investing world. Investors lost big on asset-backed securities and other investments that in many cases they never really understood in the first place. If your adviser or broker can’t adequately explain an investment in a few sentences, maybe it’s not for you.

19. Do make sure safe investments are actually safe.

J. Mark Joseph of Sentinel Wealth Management in Reston, Va., sticks with supersafe government debt for his clients’ fixed-income investments. “Bonds are for safety, so make sure your bonds are safe,” he says. “Just because something is a fixed-income investment does not mean it is safe.”

In case your bank or broker fails, make sure your bank accounts are covered by insurance from the Federal Deposit Insurance Corporation and your brokerage accounts by the Securities Investor Protection Corporation or supplemental insurance.

20. Don’t take more risk than you can handle.

Some investors will react to 2008’s losses by trying to be more prudent and conservative in the future. Others, however, will try to win back their losses through bold, risky bets on the next big thing.

That’s happened in past downturns, says Elaine Scoggins of Merriman Berkman Next in Seattle. After the tech bubble burst, investors flocked to real estate. A classic mistake is “following one investing mistake by an even bigger one.”

The past year has given investors an idea of how bad market conditions can get. In the future, investors may want to evaluate how much risk they’re really willing to take and how long they’re willing to wait to get outsize returns.

Steverman is a reporter for BusinessWeek’s Investing channel.

Courtesy of © 2009 YellowBrix, Inc.

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