Personal Finance Money makeover A formal plan will help conquer financial anxiety

By Dave Carpenter

AP Personal Finance Writer

CHICAGO (AP) -- It's time to take stock of your finances.

The average household's net worth is down 23 percent from three years ago. Unemployment is at 9.8 percent, and 11 million homeowners owe more on their mortgages than their houses are worth.

But there are signs of a recovery. Jobless claims have fallen 15 percent from a year ago. The stock market is up 18 percent since September, and the expected tax cuts for most Americans means they'll have more to spend.

After two years of embracing frugality, 2011 will be the year millions will make financial decisions they put off. This includes everything from buying a new car to getting back into the stock market.

The mixed signals have prompted even those who have been spared from serious financial trouble to second-guess old assumptions about investing, debt and home values.

"It's almost scary to be doing OK in this economy," says Andrew Craig, who owns a small telecommunications consulting firm in Chicago.

Andrew, 46, and his wife, Kelly, took a 50 percent hit in their investments and are now rebuilding. Overall, the couple from Clarendon Hills, Ill., have weathered the market turmoil well.

A key factor is that they had significant, stable income to help rebuild their losses. They have combined income of $210,000, no debt besides a mortgage on their three-bedroom house and can afford private schooling for sons Quintin, 7, and Cullen, 4.

The Associated Press paired them with a certified financial planner -- Ed Gjertsen (pronounced JERT'-sun) of Mack Investment Securities in Glenview, Ill. -- to analyze how they're managing their money.


Many investors moved their money into bonds after the 2008 stock market meltdown. The Craigs, though, haven't wavered. They didn't need to cash out, so they stuck to their resolve that the market would come back. Their planner says that should pay off in the long run.

The couple have several 401(k) accounts from previous jobs, which they plan to consolidate and possibly roll over into a single individual retirement account. This will provide more flexibility and investment options. A heavy weighting in stocks reflects the high-risk, high-reward approach they adopted when they were younger. Now, as parents, they wonder if they should be more conservative.

Kelly contributes the maximum to her 401(k). It's virtually all in stocks, including 30 percent in shares of her employer.

Loading up on company stock can leave employees vulnerable if the company crumbles. But her's is a conservative, stable company so this isn't an undue risk for the Craigs, according to Gjertsen.

With Gjertsen's help, the couple also are determining if they have an appropriate mix of diversified mutual funds. It's important to make sure similar investments across funds don't result in too much exposure to any particular stock or industry.

Gjertsen set a savings target of $2.5 million for the Craigs to maintain their lifestyle when they retire. Roughly two decades to go, they're on a path to reach that objective, he says.

Personal Checkup:

-- Consider consolidating any retirement accounts with former employers.

-- Evaluate whether you're saving enough for retirement each month.

-- Analyze the investments in your mutual funds to make sure they reflect your tolerance for risk.


The Craigs have $10,000 set aside for each son in a savings account and are contributing another $150 per month to each.

Facing a tab for their boys' college costs that Gjertsen estimates at around $375,000, they know they need to significantly step up that pace.

At Gjertsen's suggestion, they will set up a 529 college savings plan. This will allow them to invest the money and make tax-free withdrawals for eligible college expenses.

Their primary savings goal, Andrew says, is to make sure he and Kelly are on track for retirement. That's a priority most any financial adviser would applaud.

Personal Checkup:

-- Calculate a savings goal for college expenses.

-- Research 529 college savings and prepaid tuition plans to determine what's the best choice.

-- Set up a plan for how much and how often you can contribute to college savings.


The couple took out a home equity loan for Andrew to pursue an executive MBA degree at Northwestern University in 2007. They were able to pay off the $120,000 expense in only two years. "We really hunkered down," he says.

Now they just have to focus on paying off the remaining $283,000 on their mortgage. They use three credit cards but always pay off the balance.

Their absence of all other debt is impressive, says Gjertsen, and an example for anyone to follow. It's also what allows them to save 15 to 20 percent of their income.

Personal Checkup:

-- Analyze how much you're paying in credit card interest each month; look for ways to lower that cost.

-- Set up a plan for paying off your debt, targeting high-interest borrowing.

-- Save before you charge; pay cash whenever possible.


The Craigs were frequent world travelers before they got married. Now they go abroad every two years, most recently on a family trip to Scotland. It's one sign of their general restraint when it comes to spending.

Their house is a modest 2,000 square feet, and the only car they own is a 2002 Ford Explorer.

Other notable expenses, such as paying $6,000 a year for their young children's tuition and going skiing several times every winter, aren't overly extravagant either.

Still, they wonder whether they should pare back. "It's not so much what the Joneses are doing, it's what should we be doing," says Andrew.

Gjertsen is putting together a spending plan to help them better understand where their money is going. He also suggests the Craigs go through a seven-day cash challenge, which entails guessing total expenditures for a week and then paying cash for everything. Using cash, he says, is a much better way to stay in touch with your spending than credit or debit cards, which he calls the equivalent of poker chips.

Personal Checkup:

-- Track your spending so you understand where your money is going.

-- Set up a budget so your spending limits are clear.

-- Routinely review your spending and adjust your budget as appropriate.


The Craigs have set aside six months' worth of expenses in an emergency fund. That's a precaution most people fail to take, although it would be preferable to have even a full year's worth to protect against job loss.

One area where the Craigs could have more financial protection is in term life insurance, to cover the mortgage, college and any other obligations in their absence. The Craigs plan to bump it up at the planner's suggestion.

Gjertsen also recommends the couple supplement their will with a revocable living trust, which would allow them to specifically earmark where their assets go rather than just leaving it to their children and any other beneficiaries.

Overall, though, he thinks the Craigs should stop feeling nervous about their position. They're doing a good job with their finances but are overly anxious, he says.

The combination of solid income, low debt and staying away from reckless spending should provide most anyone with valuable flexibility as options and demands arise.

Published: Wed, Dec 15, 2010