Safe Money in Tough Times: Questions and Answers with Jonathan Pond

My wife is a public broadcasting fanatic. I recognize its value, but mostly I just tolerate it. (I often joke that NPR is “noise pollution radio” — I can't think when it's on.) Usually the television pledge breaks annoy me, but one night last week, the local station employed a clever tactic. They had a financial expert answer viewer questions between pleas for more money.

Jonathan Pond bills himself as “America's financial planner”. He runs a financial planning firm in Boston, but last Tuesday he was here in Portland, Oregon, fielding questions from the folks who called in to pledge money to public broadcasting. (Pond was also giving away copies of his new book, Safe Money in Tough Times.)

The questions Pond answered were a lot like the questions I've been receiving here at Get Rich Slowly. I don't have time to answer most of the questions readers submit, and some are beyond my ken. (Remember: I'm just an average guy.) When I realized that a financial expert was going to tackle topics of interest to my readers, I grabbed a pad of paper to take notes. I've reproduced some of the most interesting responses below.

Note: These questions and answers are not verbatim. I wrote as quickly as I could while watching the show, but I missed a lot. I've tried to preserve the information as best I can.

 

Does diversification still work? It seems like the rules have changed over the past year.
The biggest risk in investing is taking no risk at all. The diversification rules have not been thrown out the window. The actual problem is that people were not diversified before the crash. Many folks had put all (or most) of their money into stocks. The solution isn't to now just over-load in the other direction. Diversification and asset allocation are about finding balance.

This seems like a once-in-a-lifetime opportunity to invest in stocks, but my friends think I'm crazy for wanting to do so. They think I should stay away from them. What do you think?
If you're any sort of contrarian, now's a great time to get in, a little at a time. Use dollar-cost averaging. Think about 10 years from now. Do you think the market will be lower or higher? Unless you need the money soon, don't think about where the market will be next year, but where it will be in a decade.

It seems like there's no safe place for my money now. Is there any safe place to still get a decent return?
There are four relatively safe places to put your money right now and still get an okay return:

In fact, Pond believes that this is a once-in-a-lifetime opportunity to pick up high-quality municipal bonds. (I've seen similar sentiments in big money magazines lately, too.)

How much should I set aside for emergencies?
In this difficult market, if you're a retiree, you should have two years worth of money set aside. If you're young and working, you can get by with less.

I was 100% in stocks, and have lost a lot of money. I still haven't diversified (am still 100% in stocks). I'll retire in 5-7 years, and will need the money then. Should I stay in stocks (to maximize possible returns) or should I diversify?
Diversify. Five to seven years is too short a time to be wholly invested in the stock market. If your time horizon were longer, you might be able to do that, but the sooner you need the money, the more important diversification is.

My employer is going to suspend the company match to our 401(k) plan. Should I continue contributing to the 401(k), or should I contribute elsewhere?
Keep contributing to the 401(k) unless you anticipate tough times. Dollar-cost average. Dollar-cost averaging is a good strategy, and now especially is a great time to do it. They key to creating what you need for retirement is to contribute regularly, and to increase contributions when you can. Also, invest in yourself. Get more training. Use your brains. Make yourself more valuable to your company. [J.D.'s note: Pond's advice is good, but I think he missed the point of the question. I think the person meant, “Should I switch from a 401(k) to a Roth IRA?”]

We're nearing retirement, but we're not well-prepared. It was a challenge before the recession, but it's even worse now. What should we do?
It will probably cost you less to retire than you think. Don't listen to the talking heads who say that it will cost you 80%, 90%, 100% of your income. You can do it on 60% of pre-retirement income. If you're really pinched, downsize your house. You might have to relocate to a less expensive region of the country. Also consider delaying retirement, or retire gradually. Delaying retirement by five years can make a huge difference.

My 401(k) is disappearing. What do I need to look for when investing in mutual funds?
Many people unwittingly put all of their money into stock mutual funds. If you lost more than 40% last year, you probably don't have enough diversification. Don't give up on your 401(k), but do make sure that your investments are diversified.

Interest rates on CDs and returns on mutual funds are way down. A friend told me about an investment guaranteed to return 14%. Do you think this is legit?
People are attracted to easy money. They want to get rich quick. But there aren't any legitimate investments that guarantee 10% or 15% a year. If something looks too good to be true, it probably is. One way to check is to show it to some friends that you trust and see what they have to say.

Should I cash out my IRA to pay for a child's college education?
It's never a good idea to cash out an IRA for college. It's never a good idea to stop contributing to them, either. There are other sources of college financing: loans and other financial aid. Save what you can, but don't mortgage your own future for your child's college education. [J.D.'s note: Trent just wrote about this last week.]

With the state of the economy, is it better to pay down credit card debt or to build savings?
Right now, it's probably best to slow down debt repayment to build savings. In this economy, slowing down on credit cards may actually make sense in order increase the amount of emergency savings that you have set aside.

I'm falling behind on my debt. I'm unemployed. I'm having trouble keeping up with my credit card bills. What should I do?
It's important to be pro-active. If you anticipate falling behind, contact your creditors before they contact you. They can't work miracles, but many will have programs to help. Go to a legitimate credit counseling organization, not the sort you see on informercials. Use bankruptcy as a last resort, but don't go to a bankruptcy attorney (because they're going to think you should choose bankruptcy). Get an objective opinion.

Conclusion
Most of the advice coming out of reputable financial planners nowadays is very similar: Don't panic, diversify, know your investment time horizon. They emphasize the fundamentals: spend less than you earn, have an emergency fund, etc. None of this is revolutionary, of course, but that's because there are no magic bullets. I'm surprised at how many people complain about this advice. They think it's facile because it's basic; they want something inventive or new. But you know what? The basics are the basics because they work. Most of the time, when you stray from the proven path, you put yourself at risk for financial disaster.

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Beth @ Smart Family Tips
Beth @ Smart Family Tips
11 years ago

Good info. here. Any chance you’ll do a review of his book?

Neal Frankle
Neal Frankle
11 years ago

I like your conclusion. The truth is the truth and it doesn’t change – only our willingness to accept it changes.

Brad
Brad
11 years ago

I disagree with the not paying off a credit card to build up savings. Your getting charged fees and interest. If you are paying off your credit card and an emergency comes before you build up savings you at least still have room on the card as a last resort but weren’t paying as much in interest.
The rest of it is good.

dee
dee
11 years ago

What’s ‘Dollar-cost averaging’?

ObliviousInvestor
ObliviousInvestor
11 years ago

“None of this is revolutionary, of course, but that’s because there are no magic bullets.”

Amen to that.

Anything promising to be a magic bullet is just cleverly-disguised snake oil.

J.D.
J.D.
11 years ago

@Dee (#4)
If you follow the dollar-cost averaging link in the article, it will take you to a page that explains the concept in more detail.

In short, dollar-cost averaging is an investment method in which you contribute small amounts at regular intervals. You might, for example, contribute $200 every month to your Roth IRA. When you use this method, you ignore the market’s ups and downs.

Brian
Brian
11 years ago

At a basic level, Dollar-cost Averaging means putting money into the market at regular intervals (like each paycheck, or once a month). The reason that this is a good strategy and can insulate you from danger long-term is two-fold. Since the stock market goes up over the long-term, your money is going to increase, even if short-term fluctuations seem huge. Sometimes your money will be going in when the stock market is high, sometimes it will be going in when it is low. On average, you’re just getting the benefit of the stock market’s overall rise. The second benefit is… Read more »

plonkee
plonkee
11 years ago

I like to see sensible advice like this. My favourites are the suggestions to consider delaying retirement (time makes a huge difference because of compounding), and to be wary of investments promising huge returns (if it sounds too good to be true, it probably is).

I’m always intrigued by how you should go about withdrawals in retirement – attempting to smooth the peaks and troughs of the market – but I’m too far away for it to be on my radar, the suggestion to increase the amount you have in savings sounds like a very good one.

Money Progress
Money Progress
11 years ago

Aww, I like NPR quite a bit! I do understand the hatred of the pledge breaks though. Luckily our local station does it only a few times a year for a week or two, then they stop. I listen to something else during those weeks 🙂

I like their Marketplace program about financial news so much that I find myself timing my work commutes to line up with when it airs! (I only listen to the radio in the car.)

James
James
11 years ago

I’ve found public radio to be absolutely invaluable. My local station has local programs, most of the daily NPR stuff, and of course Marketplace from American Public Media. I even enjoy Car Talk and their other weekend shows. The value I get out of it far exceeds the contributions I began making last year (not a lot, but what I can afford), and the pledge drives two or three times a year are nothing at all. I’ve found that after listening to Fresh Air with Terry Gross, or Diane Rehm, I’ve developed an extreme intolerance for how interviews are conducted… Read more »

Michele
Michele
11 years ago

People tend to get caught up in the news of the day regarding the economy and don’t seem to think long-term. Stocks and real estate go up and down all of the time. It’s hard not to look past the current conditions which are only temporary. I wrote a post about it today in my blog, in fact!

retired
retired
11 years ago

Being a retired person and having lived in the 80’s. Do put money into retirement. Pay off you credit card and then pay it off every month. We use our credit card as a checking account. Do not retire owing money. Drive your car 10+ years, we have gone to one vehicle due to health problems of my husband. Our daughter is still driving the car I drove her to school in a 95 Olds. We retired healthy. We built a house after retirement, real estate is an investment. Our mistake was in financing the home instead of paying it… Read more »

Rose Fox
Rose Fox
11 years ago

@Brad #3: That’s what I thought, so I kept paying down debt and didn’t put anything into savings. Then my credit card companies closed my unused emergency card and cut the limits on the others (citing, ironically, that my debt-to-available-credit ratio was suddenly much worse… thanks to the emergency card being closed!). Now I have no savings AND no available credit, which is not a good place to be. JD, at some point I’d love to hear what you think of bankruptcy as a viable option. I realized the other day that since I no longer use credit to purchase… Read more »

Shara
Shara
11 years ago

@ Rose, I know your question was to JD, but I have very strong feelings about bankruptcy as I have some experience with it from the creditor end. From my perspective debt you take on is a moral obligation. You gave your word to these places that you would pay them back money if they lent it to you. While bankruptcy is legal, I don’t think it’s the RIGHT thing to do in many cases (though not all). From the other direction people who declare bankruptcy are much much more likely to do so again. I don’t know if it’s… Read more »

KC
KC
11 years ago

Use the same investing principles we should have been using all along – buy stocks when they are low, diversify, invest money that you don’t need in the short-term (next 5 years). Buy good long term investments – things you’ll still want to own in 10 years. And DIVERSIFY (it bears repeating).

I began buying stocks again the other day. I bought long term stocks (GE, MCD, YUM and some indexes) with long term money. I’m also, for the first time, moving into bonds. I’ve learned my lesson.

Stacey
Stacey
11 years ago

It breaks my heart to hear that someone retiring in 5-7 years is 100% in stocks – WHY??

We just found out one of our relatives did that – and lost more than half their retirement at age 60. Here’s hoping we learn a few valuable lessons from this mess.

Camille@TheFinancialWoman.com
11 years ago

Another good post. That comment from “Retired” has some very wise words, and puts all of this into perspective. They made some lemonaide out of lemons.

This article also reminds me that timing is so important. While exact tops and bottoms are impossible to pick, I do believe that historical values and the big picture should be considered in every investment, including a home purchase. This can just be in the form of asking what has happeneded over the past few years in that asset class, and noticing if everyone currently buying, or if everyone currently selling?

Ken
Ken
11 years ago

“This seems like a once-in-a-lifetime opportunity to invest in stocks, but my friends think I’m crazy for wanting to do so. They think I should stay away from them. What do you think? If you’re any sort of contrarian, now’s a great time to get in, a little at a time. Use dollar-cost averaging. Think about 10 years from now. Do you think the market will be lower or higher? Unless you need the money soon, don’t think about where the market will be next year, but where it will be in a decade.” Pretty bad backup for his point,… Read more »

mwarden
mwarden
11 years ago

“With the state of the economy, is it better to pay down credit card debt or to build savings? Right now, it’s probably best to slow down debt repayment to build savings. In this economy, slowing down on credit cards may actually make sense in order increase the amount of emergency savings that you have set aside.” J.D., I don’t understand why you keep recommending this. It makes no sense. The emergency fund is there to avoid the need to use high interest debt like credit cards in emergency situations. Why would you avoid paying down high interest debt you… Read more »

ryan
ryan
11 years ago

I agree with others who are against the idea of holding on to credit card debt in order to build an emergency fund. Yes, I understand the basis behind it; you ought to have some cash b/c the creditors could lower your limits, etc. Actually, the advice of some “experts” gets worse than this. A contributor in the Wall Street Journal yesterday even went so far as to recommend that people who have no credit card debt but also no savings ought to take a cash advance on their credit cards and deposit that into a savings account in order… Read more »

allen
allen
11 years ago

I’d love to see an article comparing ROTH 401k to traditional 401k (HINT HINT). 😉 If my company stopped matching on the 401k, i would move the same amount of money each month that _i_ am putting in, over to a Roth: I have FAR more control over the investments in a Roth account, then with the VERY limited 401k options I have. Also, i second the concept of paying off your CC debt FIRST: If you have an emergency, you can use the card again, but you’ve saved ALOT of money in the mean time from those debt payments.… Read more »

CB
CB
11 years ago

Allen,

What about the tax advantage of the 401K now? I find that having the max taken out of my salary (and it is not matched), reduces my taxes.

Jeremy
Jeremy
11 years ago

Hear! Hear! for retired. It’s said that the only thing money is good for is to keep you from worrying about money. Let’s keep in mind that money is a means to an end.

With all the comments about diversification, I wonder how many people here are, and with what? So if I may, who here is invested in something other than stocks, funds, bonds, their home, or their own business? Who invests in:
1) Gold?
2) Collectibles?
3) TIPS?
4) Investment real estate?
5) Anything else???

mwarden
mwarden
11 years ago

@Jeremy:

I think a wise investor is invested in gold, but it is quite expensive right now. If it drops to low $800s, I will buy more. TIPS can provide similar safety, but frankly I find it a little odd that people who fear inflation are trusting the Treasury to cover the loss (an oversimplification, I know).

Des
Des
11 years ago

@ryan Amen. If someone is in a place so desperate that they need to cash advance to have any savings, they should be doing everything else possible to remedy that situation. We found out yesterday that my in-laws just traded in their recently paid-for sedan for a new SUV. Their excuse? We’re having a baby and we needed the extra space. (This is baby #1, btw). Just a few months ago they asked us to please not spend more than $10 on a Xmas gift for our mother, because that’s all they could afford and they didn’t want to feel… Read more »

ryan
ryan
11 years ago

@des, If I was in your situation, the moment the family member asked me to limit my x-mas gift FOR SOMEONE ELSE would, for better or worse, be the moment I stopped keeping my mouth shut. I’ve also seen that same situation with the expected first baby requiring an upgrade to a new $30,000 car. And I have children, so I know the absurdity of it also. It’s maddening, isn’t it? We have friends who had a nice townhouse close to their jobs and two fairly new cars, both still financed. Getting ready to have a baby they traded up… Read more »

J.D.
J.D.
11 years ago

I’m curious from an informational perspective(I’m not trying to get into an argument): Those of you who say that it’s a bad idea to build a savings cushion before paying down high-interest debt, how do you feel about Dave Ramsey’s debt snowball? My guess is that there’s going to be a dividing line here, that you folks don’t like the debt snowball either. I’m ready to be completely wrong on this, but I’m curious how things split… I hear what you’re saying, and I understand the math, but having been in that position before, and having been one of those… Read more »

Chris
Chris
11 years ago

I understand the point that #3 (Brad) and #19 (mwarden) are making, but I think they’re looking at it as black and white, when in reality it is a range of grays. As #13 (Rose Fox) pointed out, as you pay down CC debt the card companies are lowering limits. I recently had my AMEX dropped to just above the owed amount. A friend of mine paid down two cards for a pending home improvement project, but had the maximums dropped too. This is the best argument against Brad’s point of paying the CC’s down fast – it won’t give… Read more »

Des
Des
11 years ago

JD – I like Dave Ramsey’s snowball for getting started with debt repayment. I agree that there is a huge psychological change that takes place as a person transitions from a spender to a saver. However, Once those first few small debts are paid off, I think a different strategy is needed to move forward and tackle the larger ones. For myself, having savings in the bank (especially liquid savings) was too tempting. When an emergency came up, it was easier to overspend on it because “we have the money”. Whereas, when I truly needed to put something on a… Read more »

ldk
ldk
11 years ago

Just my 2 cents…
High interest debt first; then a savings account; then low interest debt(mortgage.)

Brent
Brent
11 years ago

I recommend a phased approach to the emergency fund. Mathematically its setting a dollar value on your risk. Build a small one, then pay off the higher debts, then increase the fund then pay off medium debts and then find a long term balance you want to maintain. Having SOME sort of emergency fund is key. Bad things always seem to happen at the same time.

E
E
11 years ago

I have a question slightly related to the savings vs. debt balance. My boyfriend paid off his cc debt with a HELOC & put a car on it (his last was on its last wheels at 300,000 miles & he intends to keep this one just as long if possible). He had used his cc to work his way through college while supporting a family and ultimately a divorce. He has no cc debt now and has not put anything on credit for a few years. Would he be better off rigorously paying off the HELOC or building up savings?… Read more »

mwarden
mwarden
11 years ago

@E:

Your perception is wrong, unfortunately. What you are not considering is that he took credit card debt, which is unsecured (meaning there is no asset backing up the loan) and turned it into secured debt (meaning if you don’t pay it, the credit card companies own your home). He is not debt free; he just changed one form of debt into a less preferred form of debt.

Since he did this, the priority should NOT be paying off the debt, but making absolutely sure you can make every payment.

StackingCash
StackingCash
11 years ago

@ E,

HELOC is worse than credit card debt because he can lose his house if he ever has problems paying it back. Credit card debt is unsecured, so you would just get a bad credit score. However, it looks like he was just using the HELOC as a financial tool to his advantage and seems pretty responsible. In light of this I’m in the camp that says to pay off the HELOC instead of saving and use the HELOC for emergencies ONLY.

a different ryan
a different ryan
11 years ago

JD,

Find some NPR shows you like and listen to them via podcasts.

If you’re not listening to Planet Money, you’re doing a disservice to your readers! npr.org/money

Ryan

chacha1
chacha1
11 years ago

“The basics are the basics because they work.” Yes, yes, YES! But the problem is so many people want a magic bullet, or they think something is different/special about their situation. It’s just like losing weight: you have to burn more calories than you consume. Very simple … but not easy. As someone teetering on the edge of the 1st phase (i.e. still in debt, with a plan, but with a partner who is still in debt without a plan) I don’t contribute to the 401(k) available through my employer, but I am about to buy some stock through profit-sharing… Read more »

Shara
Shara
11 years ago

@E I think it depends on the specifics. Ultimately he needs an emergency fund more than he needs to pay off the debt. But how much extra cash does he have every month? Increasing your savings/investments and decreasing your debt are interdependent goals but they mean different things. After one has an emergency account I think he should do both. You can either decide on a split (like 50% to savings and 50% to debt), or you can set specific goals. For example on one loan I had I had the goal to always pay at least as much extra… Read more »

Don
Don
11 years ago

The problem with rebalancing your 401K now if you have money mostly in stocks, is that you will be selling low. It probably is a good idea to diversify future contributions.

mwarden
mwarden
11 years ago

@Don: I’m confused by your comment. That’s not a valid scenario. If you were balanced before the downturn and have not re-balanced, then you are too heavily into the other asset types. This is the whole point of re-balancing. Re-balancing now will force you to by stocks low and sell your other assets at relatively high (with respect to stock). Now, if you are saying that people were not balanced before, that might be a problem. However, it would be pretty difficult for them to STILL be too heavy into stock after losing 40% of their stock portfolio’s value. Seems… Read more »

Bon
Bon
11 years ago

I’m sorry, but if someone is living so close to the margin that their debate is truly between paying down high-interest debt and creating an emergency fund, not only do they need to live below their means, they need to get creative and GET MORE INCOME. Take a second job, if you can’t find one you want, take a job you may have thought yourself “too good” for (FYI, if you have a ton of debt and no emergency fund, you are in no position to be picky), freelance, sell things, make things, ask family members (kids or non-working spouses)… Read more »

Don
Don
11 years ago

mwarden:

My point was simply that buying bonds now with proceeds from the sale of equities would be a mistake. If you are going to rebalance because you are more heavily in to bonds than you want, then it is a good idea to buy equities out of the sale of bonds, because you will be getting a bargain.

Emma Anne
Emma Anne
11 years ago

I disagree that a bankruptcy lawyer will reflexively recommend bankruptcy. They will know the law better than anyone and lay out your options for you. These guys are plenty busy right now without encouraging anyone to file who shouldn’t.

Emma Anne
Emma Anne
11 years ago

Shara: “I know your question was to JD, but I have very strong feelings about bankruptcy as I have some experience with it from the creditor end.”

I have had clients go bankrupt and not pay me too, and it is painful. But it is part of the business landscape. We business owners need to protect ourselves where possible and factor in some amount of non-collectables. Brooding over others’ morals isn’t helpful.

Alif
Alif
11 years ago

I completely agree– the basics are the basics because they work.

Keep the good “basic” advice coming! 🙂

E
E
11 years ago

Thanks for the comments, mwarden, StackingCash, & Shara.

Shara
Shara
11 years ago

I wasn’t brooding over her morals, but I think our culture has moved away from feeling a debt is a matter of personal honor. I absolutely make judgments based on what I consider moral and right on top of what is legal. I added that caveat of being a creditor for two reasons 1) to let her know where I was coming from (as opposed to a lawyer or fellow debtor) and 2) to remind here that there are people on the other side of the equation. Our laws are what we all morally agree is right. Owning another person… Read more »

Holly
Holly
11 years ago

I do understand the rationale behind building up the emergency fund before paying off the cc’s. I, for instance, have a cc @ 0% for 12 months w/a $600 bal. and another @ 3.6%/life of balance w/a $1900 balance (both require a $0 min. payment). I would much rather send any extra $ into an emer. fund and pay off these low-cost balances a little at a time. NOT HAVING THE CASH HANDY WHEN IT’S NEEDED IS WHAT CAUSED THIS DEBT IN THE FIRST PLACE. Keeping the stash of cash acts as a buffer…no more car repairs on a “payment… Read more »

Rose Fox
Rose Fox
11 years ago

@Emma Anne: Actually, I was about to comment thanking Shara for reminding me of the moral aspect of this decision; while right now my priority is making ends meet (very difficult with my partner out of work and all this debt to pay off), I agree that there’s a lot to be said for honoring one’s promises and contracts even when it’s difficult.

quinsy
quinsy
11 years ago

@ Rose Fox: Shara is right. I make $45K and I have been steadily making payments every month for the past 2 years on my debt of $185,000 (from medical school). I also owe $8000 in informal debt to my parents from helping me out with expenses during med school, and I make a small payment to them every month as well, with a promise that I will pay them more as soon as my high interest loans are paid off. I live in Boston so I know city life is more expensive, but I know it must be possible… Read more »

ryan
ryan
11 years ago

JD, You asked in #27 “I’m curious from an informational perspective(I’m not trying to get into an argument): Those of you who say that it’s a bad idea to build a savings cushion before paying down high-interest debt, how do you feel about Dave Ramsey’s debt snowball?” Basically your question and many of our arguments keep going back to the same fundamental debate: mathematics vs. behavior. In most cases the right answer is a combination of both. Dave Ramsey’s method seems to be very successful, so I think that’s great, math be darned. But the reason that I think it’s… Read more »

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