By Lisa Leslie, Family & Consumer Sciences Extension Agent II at UF/IFAS Extension-Hillsborough County
Reviewed by Martie Gillen, PhD, Department of Family, Youth, and Community Sciences, University of Florida
During the Great Recession of 2007-2009, many people experienced large financial losses. Some lost their jobs, forcing them to draw on their savings. Others lost significant value in their investments and retirement funds, while still others were forced to go into foreclosure or declare bankruptcy.
In many cases, these people had done their best to get ahead financially, but faced overwhelming external circumstances. In truth, there is no way to eliminate all chance of financial loss. But there are some important steps you can take to significantly reduce that risk. Below are some ideas.
Liquid Funds
One general rule of thumb is to have 3-6 months of living expenses in a savings account. However, if you are retired or close to retirement, you probably want to have more money available to you in so-called liquid assets. These are assets such as savings accounts and money market mutual funds that are easily converted to cash with no principal loss. This will provide a cushion, and may enable you to avoid selling investments in a depressed market.
Diversification
Invest in a diverse mix of investments. Holding stocks in many different types of companies, along with bonds and other types of investments, reduces risk. Mutual funds can be a cost effective way to achieve diversification.
Insurance
If you have dependents, life and disability insurance is likely a necessity. If you are single and without dependents, disability insurance is a priority. Make sure your liability and property coverage is adequate. Increasing your deductibles may make higher levels of coverage affordable.
Understand Tax Consequences
Taking early distributions from retirement accounts can lead to a big tax bill. Investigate other alternatives, such as a loan or hardship withdrawal. If you have Roth retirement accounts, you can access the principal without tax penalty.
Be Realistic About Debt
Consider the total cost of a loan and its terms before assuming debt, such as a mortgage. Avoid entering into a loan agreement based on the assumption that you will be able to refinance in the future. Examine your budget and evaluate what you can realistically afford while still comfortably managing other expenses.
Choose the Right Investment Vehicle
Socking away money for retirement in a savings account may sound risk free. Unfortunately, inflation and taxes can eat away at your savings.
It can be a tough balance to meet your current financial needs while also planning for potential setbacks. But careful planning, saving, and investing, as well as being properly insured, can bring long term benefits.
Further Reading
Money Matters publications at UF-IFAS EDIS
(Photo credit: Piggy bank awaits the spring by Philip Brewer. CC BY 2.0. Cropped.)
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