Should the recession affect your money management? Is it a good idea to take money out of a 401(k) to pay off your mortgage? TODAY financial editor Jean Chatzky offers advice on these timely issues, plus wise words about protecting your credit, investing and more.
Q: Earlier this week it was finally confirmed ... we're in a recession. What does that mean for the average person? Should people manage their money differently now?
A: Not so much. The announcement that we've been in a recession for a year did not come as a huge surprise to people. If there was anything surprising in the announcement, it might be the news that we are going to be here for some time. That means if you have not already put yourself on an austerity budget, then you really should be thinking in that way. If you open the papers on any day, you read about thousands of layoffs that are still coming, and if that is you the next time around, you want to be prepared. That is why it is so important that you have that six- to nine- to 12-month emergency cushion.
I used to tell people to have a three-month emergency cushion. And the reason that number is going up is because it is just taking that much longer to find a new job.
So what do we do? Take a deep breath. Make sure that you are not spending more than you really need to spend this holiday season. Make sure that you have a mix of investments. We are in the middle of a storm and we need to make sure that the rations last through the winter.
Q. My job was eliminated this year. I had been contributing to a 401(k) and my company's Employee Stock Purchase Program. What are some good choices I can make with these investments? Is it true I need to do something with them or they will just start cashing out on me? I want to reinvest, but I'm not sure what's best for my situation. At this time, I am unemployed. — Angela, Woonsocket, R.I.
A: In general no, they will not start cashing out on you. Typically, as long as you have a balance of at least $5,000 — and sometimes as little as $1,000 — in your 401(k), you can leave the money in your former employer's plan. It's worth a call to your ex-benefits department to be sure. This is a fine option as long as you are OK with the investment choices in the plan and you're not being assessed onerous fees. If the fees have climbed since you lost your job or you don't like your choices — or if you want to consolidate these assets with other investments — you should roll the dollars into an IRA. That way you preserve the tax benefits and have total control over how the money is invested. How you should allocate those assets really depends on your age, your risk tolerance and how long until your retirement.
Typically, it's best to take 100 minus your age and put that much in stocks, with the rest split between bonds and cash. That's for your long-term investments. Lastly, you didn't mention how you were fixed for cash and other emergency funds to tide you through this period of unemployment. It's worth doing some spending planning NOW so that you can make your funds last as long as possible and reduce the chance you'll have to raid your retirement accounts to get b
Q: One of our credit cards was canceled by the bank due to inactivity. We have great credit and did not request the card be canceled. The reason reported for cancellation was they said it's credit sitting unused that could be used elsewhere. In the meantime, our credit standing is jeopardized! Is this legal and do you have any rights or grounds to correct this situation? — David, Naples, Fla.
A: Unfortunately, you are not the first person to register this complaint — and you won't be the last. Banks and other lenders are not only chopping credit card lines with increasing frequency, they're cutting off home equity lines of credit as well. From the card issuers’ perspective, if you have unused credit on this card — or on other ones — there is a chance you could go on a spending binge at any time and then be unable to pay their bill. Is this fair? It certainly doesn't feel fair, particularly if you are one of those people who pay their bills on time, therefore holding up your end of the bargain. Is it legal? Absolutely. The contract you signed when you got your card allows the issuer to change terms on you with very little in the way of notice.
So, what can you do? You're right that this will likely ding your credit score because it will hurt the utilization ratio that represents one-third of your score. (This is the percentage of your credit that you're actually using. When the total credit goes down, the ratio worsens.) But before you panic, take a look at where your score is now and how much it was hurt by this account closing. It may not be as much as you think, in which case, I'd just chalk it up to the times. If it was substantially lowered, to bring it back in line, you want to work on the same utilization ratio. Either pay down debt on the other cards in your wallet, or call one of those cards (the one with which you have the longest, best relationship — i.e., you use the card a lot) and request an increase in your credit line. Don't try this move too often. A request for an increase in a credit line is seen by the credit bureaus as a request for more credit. That, too, can ding your score a little bit.
Q: My husband’s job is very uncertain. He just turned 61 and will have a hard time finding a job. He wants to take money out of a 401(k) to pay off our mortgage. We owe about 8 to 9 more years. Should we do this? — Monica, Chicago, Ill.
A: No, no — and how should I say this — no. I know the 401(k) assets look like an attractive target because your husband is over 59½ and therefore he can pull money out of his 401(k) penalty free. But what you have to realize is that money in your 401(k) can continue to grow income-tax free — and you want to maintain that tax deferral as long as you possibly can. Here's what I'd do instead: Look into refinancing your mortgage. Mortgage rates have fallen to their lowest in a year — a 30-year fixed-rate loan is at 5½ percent. If your interest rate is higher than that, you may want to look into refinancing the loan (though I wouldn't refinance into a new 30-year term, I'd refinance into a 10- or 15-year term, which should net you an interest rate that's even lower). That may save you some money out of pocket every month. Also, in this time of uncertainty, you should look at cutting your living expenses in other ways. Take a detailed look at your budget to try to give yourself some breathing room. That way you, preferably, keep your savings intact. They have to last you for many, many years.
Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site,