The tally for last week's government rescue plan: $700 billion. The number of job cuts in September: an eye-popping 159,000. And on Thursday, the magic number was 9,000 -- or, more precisely, below 9,000 -- where the Dow Jones Industrial Average found itself for the first time in four years.
For consumers, these numbers indicate one thing: Now's the time to do everything you can to protect your finances. A couple weeks ago, we offered 5 Tips for Navigating Troubled Markets. Here are four additional smart money moves to make now:
Convert to a Roth
The down markets may decimate your retirement savings, but they also provide a rare opportunity: To convert your traditional IRA into a Roth IRA with a reduced tax hit. (For a tutorial on the differences between these two types of IRA accounts, click here.) When you convert a traditional IRA to a Roth, you owe ordinary income tax on every dollar you roll over (unless you've made nondeductible contributions to the account). Fewer dollars in your account spells a smaller tax bill. And if you covert the account only to see your balance dip further, you can always redo the conversion, so you aren't paying taxes on gains that are now gone.
A big perk of Roth IRAs is that withdrawals taken during retirement are completely tax free. That's a big gift from the government. Typically, Roth IRAs make the most sense for younger folks since they have a bigger window to benefit from the compounding growth and they're likely to be in the same tax bracket or higher during retirement. But given the budget deficit and the idea that it will result in higher taxes across the board, the Roth could benefit most people regardless of age.
The one catch with a Roth conversion is that your adjusted gross income must be $100,000 or less. Given the number of layoffs and eliminated bonuses this year, some folks who've previously been ineligible may qualify this year. If you're still making more than that amount, the $100,000 limit will be eliminated starting in 2010.
Create a Budget
"Watch every dime coming into your house, because tomorrow it could be a nickel," warns Catherine Williams, vice president of financial literacy for Money Management International, which oversees nonprofit credit counseling agencies. There's no better way to do this than to stick to a budget.
The basic premise of a budget is, of course, simple: Make sure expenses don't exceed income. (Click here for a few easy budget cuts.) But you also need to find a way to squeeze out some savings, says Donald Ray Haas, a certified financial planner and president of Haas Financial Services in Birmingham, Mich. "Until you accept that, you're in trouble."
Check your budget breakdown against these rough guidelines from Money Management International's Consumer Credit Counseling Services:
- Housing (20-35%)
- Food (15-30%)
- Transportation (6-20%)
- Medical (2-8%)
- Insurance (4-6%)
- Utilities (4-7%)
- Clothing (3-10%)
- Personal Care (2-4%)
- Misc. Items (1-4%)
- Personal Debt (20% maximum)
- Savings (10% minimum)
* Source: Money Management International
Eliminate Debt
Sound investing is one way to shore up your personal balance sheet. But if today's stock market has you spooked, you can get a nearly unbeatable return by focusing on paying off debts instead.
High-Interest Credit Cards
Attack high-interest-rate credit cards with a vengeance by seeking out the cheapest rates you can find, says Scott Bilker, founder of DebtSmart.com. Look to credit unions, which tend to offer more favorable rates than big-name banks. Or call your card issuer and tell them you've received better rate offers. Lenders would rather lose a little money by lowering your rate than have you move your entire balance and future business to another company.
source : http://online.wsj.com
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