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Time to assess if finances are being infected


Higher interest rates and gasoline prices are infecting the family finances of millions of Americans in 2006. Not all at once, but a few dollars here and there gradually add up.

Interest-rate, inflation, financial-market and pension worries make a midyear checkup more important than usual this year. Even if you made New Year's resolutions for your money, the scenario has since changed and your family situation may have too.

Unfortunately, many Americans don't know where their money goes each month, which is a hazardous situation now that we're entering a period in which inflation could rise further.

To begin a personal checkup, write down all sources of income in the first half of this year. Use your checkbook and credit-card statements to list all expenses for that period. Next, subtract that from your income. If cash flow is positive, that's a good sign. If negative, it indicates how much you must decrease expenses to improve your situation.

Use this to project income, expenses and savings for the second half of the year. Diagnosing your spending habits helps prescribe a workable budget that includes regular savings and investment.

"The effect of higher interest rates on adjustable-rate mortgages, credit cards and home-equity loans is just part of the increased pressure on family budgets and savings in 2006," said Marilyn Capelli Dimitroff, a certified financial planner and president of Capelli Financial Services Inc. in Bloomfield Hills, Mich. "Midyear is a good time to take a fresh look at your asset allocation, insurance, estate planning and tax situation to see exactly where you stand."

Debt can land your finances in trouble. U.S. consumer credit is at a record high $2.17 trillion and growing at its fastest clip in a year, according to the Federal Reserve. Credit-card debt, in particular, is destructive because it can easily balloon out of control.

Examine all that you owe and pay off highest-rate debt first. Develop a plan to pay down credit-card bills, loans and car payments as quickly as possible so that in the long run you have more to invest.

Next, select your financial goals. Choose short- and long-term targets so it doesn't seem like an endless treadmill. Write everything down and reassess progress every six months.

One long-term worry: Nearly half of working-age households are at risk of falling short of what they will need in retirement, according to the Center for Retirement Research at Boston College. People can live decades beyond 65, still have living expenses and can't simply say they'll work until 80 because no one can accurately predict future health.

That is good reason to invest the maximum in employer-sponsored retirement plans and inquire about the strength and solvency of your firm's pension plan.

In addition, review all your insurance coverage, taking into account those dependent on you. Examine the life, homeowner's, auto and disability coverage you carry to see if it meets current needs. Make or update a will and estate plan. Give someone durable power of attorney in case you become incapacitated.

Even if you take charge, any family can suffer a calamity. So build an emergency fund of three to six months of living expenses in a liquid money-market or short-term bond fund.

Then become serious about investing, avoiding panic over recent market volatility.

"Cheer when the stock market goes down because it's an opportunity," Capelli Dimitroff said.

James Paulsen, chief investment officer for Wells Capital Management in Minneapolis, said no one should forsake growth investing altogether based simply on their age.

"Both 30-year-olds and 50-year-olds have time horizons that at a minimum are 20 years or more, so I'm not sure there should be a real difference," he said. "I also don't see any reason for a 50-year-old to be more conservative than a 30-year-old because over a long enough time period, risk goes away."

Review your half-year gains and losses in stocks, mutual funds and fixed-rate investments to see whether your portfolio needs rebalancing. Then seek out today's bargains.

"We've enjoyed a period favorable to asset groups out of favor five years ago, such as commodities, emerging markets and international, and the question now is whether that has peaked," said Richard Cripps, managing director of Stifel, Nicolaus and Co. in Baltimore. "We probably have more to go, with the only discrepancy the fact the largest stocks, based on their earnings, are much less expensive than small-cap stocks."

Curt Weil, a certified financial planner with the Lasecke Weil Wealth Advisory Group LLC in Palo Alto, Calif., recalled recently counseling a 33-year-old: "He pays off debt, has no credit history, no need for insurance beyond what his company gives, no clue about employee benefits and no estate planning. So the simpler I made investing, the better."

Weil structured a diversified 401(k) that is 30 percent iShares Russell 3000 Value Index for broad market coverage; 30 percent iShares MSCI EAFE Index Fund for international; 10 percent PIMCO Low Duration Bond Fund; and the rest in a money market account and real estate.

Andrew Leckey is a Tribune Media Services columnist.

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