CONQUERING YOUR FINANCIAL FEARS

In the course of our lives most of us face a number of significant financial milestones: financing the purchase of your first home, sending a child to college, setting aside enough to retire comfortably. Likewise, we all have moments when we wonder if we can manage it all. Here are a few of the most commonly mentioned financial fears, and some steps you can take to overcome them.

Am I always going to be in debt?
The answer is: It depends. Do you have large credit card bills on which you pay only the minimum each month? Are you paying more than 30% of your income for housing? Are you, in effect, living beyond your means? If the answer to these questions is yes, then you may be on a long and rocky road. Some debts, like student loans or mortgages are unavoidable and can actually lay the foundation for later financial stability. The key is to not take on any expenses that you can't reasonably pay off while still being able to set a little money aside on a regular basis.

Almost everyone, no matter how tight their budget, can afford to set aside a little bit each month—even if it's just $50 at first. The trick is to make a commitment to do this. As an illustration, to facilitate a modest investment program, most mutual funds will allow you to set up an automatic investment plan that will regularly transfer money from your bank account in order to buy shares in their fund. This will allow you to start putting aside money that you will need in the future—whether it's to finance a mortgage or just assure a secure retirement.

Will I have enough money to retire?
The biggest mistake that people make in retirement planning is waiting too long to start. Long-term investors profit from long-term trends, which have generally been positive for stocks, bonds, insurance products and many other investments. Further, the positive effects of compounding escalate with time. As interest and dividends are reinvested, they generate more and more income at an ever-increasing rate.

One good way to approach long term investing is to use dollar-cost averaging, investing a fixed amount at regular intervals (e.g., monthly or quarterly) in an investment such as a growth mutual fund. As the share price fluctuates, your investment dollars will purchase more shares when the price is lower and fewer shares when the price is higher. It's important to continue even if the economy goes into a decline.
While dollar-cost averaging doesn't guarantee that you won't lose money in an investment, it will enable you to reduce the risk of buying when share prices are high. Instead, you'll buy fewer shares when their cost is up, and more when prices drop.

What if I invest in something that ends up being a disaster?
The most effective way to reduce the amount of risk that your investments are exposed to is to properly diversify your portfolio.

Think of it this way: If you were to put all of your assets into one stock that suddenly takes a nose-dive, you could experience significant losses. If you had split your investment into two different stocks, perhaps one would have held steady, or even increased in value, while the other declined. Now imagine that you spread your assets over a number of investments in a number of different sectors and industries. True, there's no way to avoid losses if a particular investment enters a period of decline. But those potential losses will be offset by the investments that are holding steady, or even thriving.

Would I be able to handle a sudden financial emergency?
Part of any good investment plan is having sufficient liquid investments in the case of emergencies. A liquid asset is one that is easily convertible into cash, such as money market funds, U.S. Treasury bills, or bank deposits.

Opinions vary about how much money you should keep in this "cash cushion;" a good general guideline is to start building up an amount equal to approximately three to six months of after-tax income.