Interest rate jumps when credit account is closed

NEW YORK

The U.S. economy is in recession, and new layoff announcements seem to come daily. The stock market has fallen two years in a row, and interest rates are at historic lows. Meanwhile, people are still jittery from the Sept. 11 terror attacks.

These are turbulent times in which to be making financial decisions. Yet small, thoughtful steps now can help shore up your finances and lay the groundwork for big dividends in the future.

"This is a time to really think about your goals -- and develop the strategies to meet them," said financial planner Bob Barry of Hackettstown, N.J., the new president of the Financial Planning Association.

The first step many Americans need to take is to clear up their personal balance sheets. That is, to make a commitment to get rid of credit card and other installment debt.

Heavy debt becomes an even bigger burden if you lose your job, and it also complicates efforts to increase your savings.

Next, everyone should have emergency reserves -- money in a bank or money market fund that would cover day-to-day expenses for three to six months, Barry said.

While such a cache of cash can help you cope with a layoff or a family or medical emergency, it also will make it less likely that you'll have to tap retirement savings or other long-term investments.

"It reduces the risk that you have to take substantial amounts out of your portfolio when the market is down or in steep decline, like it is now," Barry said.

Consider investments

For many Americans, personal security has become the paramount concern since Sept. 11, said Faith Popcorn, head of the BrainReserve trend forecasting firm in New York and co-author of the newly published "Dictionary of the Future."

That translates to everything from making homes more secure with safes and guard dogs to seeking security-related investments such as life insurance, she said.

She also expects to see some people shifting their investments from the stock market to real estate.

"The fallout from Sept. 11 comes at a time when companies aren't doing well and the markets are down," Popcorn said. "When people lose confidence, they seek out things they can touch, like real estate."

Still, most Americans need to look at the basics -- regular savings and long-term investment in stocks, which have outperformed other investments as well as inflation since the Great Depression.

In these turbulent times, when interest rates are low and the markets are down, should people reduce their savings in self-defense?

"If you think that, you should see a shrink because you're being self-defeating," said Avi Horwitz, a New York accountant who teaches in the National Association of Investors Corp. program. NAIC in the nonprofit organization that sponsors investment clubs nationwide.

Learn to save more

Horwitz argues that Americans save too little, underestimating the costs of their children's college education as well as their own needs for retirement. And he points out that there are real bonuses to be earned by putting money in tax-favored accounts such as 401(k) retirement plans.

"If your company puts in matching funds, that's an immediate 100 percent return on your money," he said. "Where else can you get returns like that?"

Horwitz said that because 401(k) and Individual Retirement Accounts are funded with pretax dollars and grow tax-deferred, "the government's helping your money grow."

Horwitz remains a strong believer in the stock market but argues that would-be investors "must make some effort to have an understanding of what they're doing."

A good investor diversifies holdings between stocks and bonds. He or she looks for growth companies and companies with solid business plans, or for mutual funds with low costs and good track records.

Horwitz is high on finding companies that pay good dividends, which can be used for reinvestment or eventually to live on.

Continuing to invest in a down market offers a potential bonus, too, he added. "You get more shares for the same amount of money, so when the market takes off, you have a larger base to grow from."