5 Grit-Your-Teeth Moves for 2011

12/27/2010 4:44 pm EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Here’s a general rule of personal money management: The easiest thing to do with your money is rarely the best thing to do. 

That’s because it’s easiest to blindly follow the crowd, and the crowd tends to be wrong! Here are five money suggestions for the New Year that are guaranteed to make you wince—and just might make you or your family more financially secure in the long run.

Deny Your Children
Whether it’s about the new electronic game or the expensive college tuition, just say no.

The toughest crowd to go against is your own family. But you are successful partly because of all the things you wanted, not because of all the things you had. Desire is a very powerful motivator.  

Your children will find a way to earn the money for things they want. Don’t dig into your retirement for their college funds, because it’s highly unlikely that they’ll be taking care of you in your old age. (See “Will You Still Need Me, Will You Still Feed Me?”)

Yes, this is the toughest money decision of all—because those of us who are parents truly want to give them the things that we didn’t have. But we did all right, didn’t we? Remember the announcement on the airlines: “When the oxygen mask drops, put on your own before helping others.” That applies to money, too!

Increase Your 40l(k) Contributions
That’s a suggestion that surely runs counter to your instincts. You’ve already seen your previous contributions melt away in the stock market volatility over the past few years. In fact, younger workers seem most disillusioned, and many have actually borrowed money out of their retirement plans. 

But if you’re in your 20s or 30s, time is on your side. Your regular dollar contribution will buy more shares at lower prices—creating big opportunities in the next bull market (and there will be one—see “The Dangers of Giving Up on Stocks.”)

Even those nearing retirement will need to have some money growing in stocks, since they’re likely to live at least 20 years after their official retirement date. So go against the crowd, and keep investing. After all, if you’re going to retire in America, don’t you think you should invest in America?

Buy Life Insurance Now
Gosh, just when you can’t afford to spend another penny, the last thing you’re thinking about is life insurance. But prices for 20- and 30-year level-term policies are half what they were in the mid-1990s, according to Accuquote.com. 

A 40-year-old male in the preferred, non-smoker category could get $500,000 of coverage for $355 a year. Even if you don't qualify for the very top rating, you could get the same coverage for $460 a year. Women pay lower rates, so a 40-year-old woman could get a half-million in coverage for $310 in preferred plus, or $400 a year in the preferred category. 

Term prices are likely to rise because insurance companies aren’t earning enough on their investment portfolios. In fact, they have kept prices low this long because people like you have actually given up their policies because they can’t afford the premiums! That subsidizes the reserves for those who keep insurance in force. 

Keep Some Cash
This advice is aimed at savers and seniors who are dismayed to find they can no longer live on their interest, since CDs and money market accounts have been paying less than 1% for quite a while. The temptation is to take on riskier assets, or tie up your money for longer periods, just to gain a bit more interest. 

Resist that urge.

With the Fed announcing it will continue to “print money” there is a definite likelihood of inflation down the road. You don’t want to be locked into current rates for more than a year, when the bond market tumbles and interest rates rise. Better to dig into some of your principal to live now, than to have lost liquidity for all your money just when rates soar. (See “The Smart Money Bets on Inflation.”)

Shorten Your Mortgage Term
If you’re refinancing, cut the term of your mortgage—instead of extending it for 30 years because rates are so historically low. Yes, the crowd thinks it is sensible to lock in rates below 5% for 30 years, but that still means you’re paying nearly $280,000 in interest over the life of the loan!

Suppose you have $100,000 outstanding on your mortgage balance at a current rate of 7%, with about 23 years of payments remaining. Your monthly payment (without considering property taxes and insurance) would be $665. If you refinance that loan for another 30 years at 5%, your monthly payment will drop to $537—but you'll be paying seven more years. If instead you take a new 15-year mortgage, which will likely bear a slightly lower rate of 4.55%, your monthly payment will jump about $100 from your current $665 to $767—but you'll own your house free and clear 15 years sooner!

It goes against the crowd to own a fully paid home. But the reward in peace of mind is, as they say in the MasterCard commercials, priceless!

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