How to React When Investments Lose Money

I used to be a little bit obsessive about checking account balances, including retirement plans.  At least three or four times a week I would log in my brokerage’s website and view my balance.  Here lately that has become a panic-inducing process.  After seeing 401k value disappearing before my very eyes day after day it is tempting to start moving things into more conservative investments, even though I have a while before worrying about retirement.  Others aren’t so lucky.  It is admittedly getting tougher and tougher to stomach the call to “stay the course,” but there are a couple strategies that make things a little easier.

Keep Your Head Down

I played a little football in high school, and one of our offensive coaches used to teach our running backs to put their head down, hide behind a big lineman, and drive his legs hard for a short yardage first down.  That’s what I feel like doing now!  I’m going to keep my head down (avoid taking in too much financial news, checking balances daily, etc.), find a big lineman to protect me (diversification) and keep driving towards our goal line–an early retirement.

What About College Savings?

College savings plans are a different animal because often times investors are dealing with a shorter time frame. That is the case with us.  Our oldest child is just ten years from college, and we were counting on some growth stock mutual funds to help us save for her future tuition.  With the way our economy is headed now, it may be a while before we enjoy much growth in the funds we have already invested in.  However, with only ten years until college it is too late to save only cash, and too early to go with an ultra-conservative portfolio.  Bottom line is we are just going to have to hope for some better returns in the near future.

Emergency Savings

There has never been a better time (in our life time) to have a healthy emergency fund in place.  Most financial experts agree families should sock away 3-6 months of expenses in a highly-accessible account.  We tend to lean towards the 6 month end of that scale as we are living on one income, and because we lack short term disability policies through my employer that could helps us ride out a short-term stop in pay due to health issues.  Add to that a shaky job market and unstable economic conditions, and six months worth of expenses in the bank sounds pretty good.

Photo courtesy of epicharmus

Secrets to Living On One Income

Nearly a full year into our marriage we found out my wife was expecting our first child. Since my wife relocated when we married it meant a job change for her, and for the first couple months we were married she struggled to find a job comparable to the one she left. She had only been working a few months when we found out she was pregnant. I remember the range of emotions I felt as a “soon-to-be-dad” - excitement, joy, and sheer terror! Not only did I have the normal doubts about my parenting ability, as any new parents would have, but I also wondered how we would manage on one just one income. Before marriage my wife and I agreed she would stay home with our kids, at least until they were school age.

Unfortunately, in hindsight I realize we failed to put in enough planning for this drop to a single income. I was low on the totem pole in my career, and was barely earning enough to take care of myself when we married. My wife’s added income made us comfortable, but we were not savers by nature, so any gains we made were squandered on newlywed purchases - a new car, new clothes, things around the house, etc. We should have been piling up cash like crazy in anticipation of her departure from full-time employment (well, paid full-time employment - being a mom is a full-time job!).

At five months pregnant my wife came home because the stress of her job was taking a toll. The last trimester of her pregnancy was difficult, as was the delivery (in fact, I almost lost both my wife and daughter that day). After an emergency cesarean delivery and a long recovery for mom and baby (neonatal ICU for daughter, long hospital stay for mom and daughter) we finally came home nearly a week after my daughter was born. It was an emotionally taxing time for everyone involved, and the last thing I wanted to think about was money. We spent the next few years spoiling our little girl, paying minimums on medical bills, eating out frequently, traveling to see the in-laws, and spending all of my salary (and then some). That salary didn’t change much those first few years as my company had maxed out growth and even began rounds of layoffs. Fortunately, I avoided getting a pink slip, but went two or three years in a row with no raise and no chance of promotion.

We finally broke out of the mess when I took a new job in a new industry and relocated, but the damage was done. We now owed credit cards, medical debts and left over student loans from my first two years of college. My wife was now expecting our second child, around the time our first child was heading to school full time. It was clear my wife wouldn’t be returning to the workforce anytime soon, and we would have to continue living on one income. It was a sobering wake up call, financially.

With the benefit of 10 years of hindsight, I offer these tips for one-income families (or those considering a move to become a one-income family):

• Before making the move, pay off debts and stack up some cash. If we had it to do over again we would have made a stronger push to be debt free before my wife quit working, and we would have had a sizable emergency fund that could have helped with the labor and delivery expenses, and future emergencies thereafter.

• Stay away from new cars. Car dealers love new parents because they can usually sell them on safety, added space, and “convenience” features. Don’t be fooled. There are plenty of safe, roomy, convenient options in the used car market. Remember, you are living on one income - you can’t afford a new car!

• Do not underestimate expenses for the stay-home parent. With someone occupying the house more hours of the day, utilities will likely increase. It is no longer feasible to set the temperature to 80 in the summer and 60 in the winter during the day. The family pet will appreciate the gesture, but you will pay for it when the energy bills arrive. While employment expenses obviously decline, other expenses do go up.

• Do not attempt to keep up with two-income families. We made this mistake because several of our friends were two-income families, and they frequently bought new cars, new homes, new furniture, etc. We tried to keep up initially, but eventually realized they had more disposable income than we did and we had to adjust down.

• As a stay-home mom or dad, look for ways to be a “home economist.” Cook meals from scratch, clip coupons, make homemade crafts, or even start a garden. In other words, look for ways to save money that you probably wouldn’t have time for if working a full-time job.

Being a full-time parent can be a rewarding experience, for both the parent and their children. However, it does not come without sacrifice. Plan accordingly so you can enjoy the process, instead of resenting it because you are struggling with money.

Photo courtesy of wjhamilton4

The Envelope Budgeting System

When our family was having a hard time sticking to a budget, we went to a cash-only system using envelopes. Debit cards are convenient, and are certainly safer than credit cards, but they can wreck a budget pretty quickly if you aren’t careful.  Since debit cards allow you to swipe and go without forking over cash you don’t get that same emotional twinge you get when watching the cash actually leave your wallet.

Here’s how to get started with your own envelope budget system:

• Step 1: Determine which categories to include in your budget. Not everything in your household budget can fit into an envelope, literally. Things like utilities, subscriptions, and other recurring monthly bills are typically paid online or via bank draft. The real spending categories we are interested in are discretionary spending categories. For our family these are food, household products, gifts, entertainment, and clothing. In the beginning we also included gasoline, but the pay-at-the-pump feature is just too convenient to pass up on a cold, rainy day, so we still use our debit card at the pump. Who wants to carry kids into a convenience store to pay for $30 worth of gas in cash?
• Step 2: Use past spending to establish initial budget amount. Using Microsoft Excel and my online banking system’s export feature, I downloaded our last 90 days of transaction history. I identified which transactions fit into each of the five categories listed above. This is not an exact science as $45.90 spent at Walmart won’t help you remember the itemized list of transactions, and to which category they belong. If you still have some receipts, great. If not, just estimate your typical breakdown on a trip to Walmart. For us a $45 transaction at Walmart might look like: $20 on groceries, $10 on clothing, $15 on household products. Using your best estimate come up with an average monthly expenditure for each category.
• Step 3: Create an envelope for each spending category. Write the name of the category and the monthly amount budgeted on the outside of the envelope. You may not have enough float in your checking account to withdraw all the cash to fill all the envelopes with your first paycheck each month. That’s fine, just break down the monthly budget amount by the number of times you are paid in a month. In our family the “Food” envelope gets $200 every two weeks (I am paid biweekly), for a $400 monthly grocery budget.
• Step 4: When the envelope is empty, stop spending. The only way this budgeting system will work is if you make a pact up front not to move money between envelopes, and to not spend additional money in a category when the envelope runs dry. If the “Food” envelope is empty three days before payday then you better start searching the freezer for those two-year old corn dogs. If your “Clothing” envelope only has two dollars in it you have to pass up those “fabulous shoes” on sale at the mall.
• Step 5: Revise and repeat. No budget is going to be perfect from month-to-month, and envelope budgeting systems are certainly no exception. At the end of the month look back at your spending and determine where you could have allocated a little more, and where you assigned too much of your paycheck. We routinely have more in our clothing envelope than planned, but we simply leave the money in there because clothing purchases tend to come in waves when the weather changes, or as the kids outgrow their current wardrobe. We empty the other envelopes at the end of the month to make an extra contribution to our debt snowball. This gives us a little extra incentive to try to stay under budget in each category.

Photo courtesy of stopnlook