Lay-away and barter -- are these "old-fashioned concepts" back in fashion?

Dr. Elizabeth Warren reports, in the blog Credit Slips, "If we needed evidence of the constriction of consumer credit, here it is. K-Mart is advertising the layaway plan that department stores used for decades before the free flow of credit turned the layaway plan into a relic. "

As she points out, "With Mastercard and Visa cards handed out like cheap candy, layaway plans had nearly disappeared. The old-fashioned method for budgeting--pay a few bucks each week on your purchases--made no sense to millions of customers who could take the goods home and pay a little each month forever after."

Lay-away plans may make sense for many people this holiday season. And, wouldn't it be nice to have your holiday purchases paid for rather than receive large credit card bills in 2009?

With dollars tight, bartering is another option to consider to stretch your dollars.

Family members, including those who don't have a paid job, can contribute to the family's resources by bartering. Be creative. List your skills, talents, and interests. Next, try to match your skills and talents to community needs.

Think about what you'd like help with as well as what you do well. Do you have a bountiful summer garden? Perhaps you can trade fresh flowers and vegetables for help with car maintenance? Are you handy with home repairs, but hate doing taxes. Here's an opportunity to barter.

Over the years, I've bartered for child care, haircuts, bicycle repairs, yard work, and more. What types of things have you bartered for in the past? What could you do now? Click on my name below and let me know if bartering has been successful for you, or not.

For other money-saving tips, go to Plan Well, Retire Well and visit the Start Savings section. Online calculators and ideas for saving money will jumpstart your efforts.

Reply from Becky, Los Gatos, CA: I've done some bartering in my writing circle--as an editor, I feel like I have something to offer other writers. I tend to do critiques of manuscripts in "trade" (or usually thanks!) to another author who's let me pick their brain, who's given me time out of their busy day to braindump with me about marketing or teaching or publishing stuff. I find the best resources are from live people doing what I might want to do. And they never let me buy them lunch, so... :)

David Sinow, a clinical professor of finance at the University of Illinois at Urbana--Champaign with years of experience in investments and advising clients, has provided an interesting and, I think, useful perspective on the current turbulent stock market. For most individual investors the first two weeks of October 2008 have brought a lot of bad news regarding the performance of their funds. Many of us have lost significant amounts of money over the past year in our retirement accounts and our other investments. Sinow, in an article posted at http://illinois.edu/pc/article/72/17815 argues that a long-run historical perspective argues for being in the market over the long-run. He points out that a dollar invested in the stock market in the 1920s would, having gone through the Great Depression, WW II, and a number of post-war recessions, would be worth between $5,000 and $6,000 today. That completely dominates the return of an alternative investment that only kept pace with inflation, which would be worth about $14, according to Sinow. The point is to keep your risks in perspective -- a major risk is actually inflation, and remaining in the market, even buying in today's market of lower prices for equities, will help combat that risk. Sinow also argues that the other big risk for most small-time investors is our life expectancy, which for most of us is surprisingly long. This fact again argues for equities and their importance for long-term investors.

In reality most of us are long-term investors, even retirees and people within a few years of retirement, because our life expectancies run out into the future and we will rely on our investments to carry us for a long-time. This supports an approach of dollar-cost averaging, as well as building in the ability to weather short to medium term (for Sinow, short to medium term means up to 48 months) market downturns without having to sell positions simply to survive.

The markets have been brutal recently to individual savers and investors. Taking a long-term historical view, not a hysterical response, may be the soundest approach possible given the circumstances.

Many of us from University of Illinois Extension are involved with economics -- whether it's family economics or health economics or agricultural economics. Some colleagues of ours have recently posted a series of articles that you may be interested in. The article, The Current Financial Crisis: How Did We Get Here?, I found especially interesting.

Nick Paulson's description of the current economic crisis is an excellent summary of the mess we're currently in as a nation -- and the implications for households is obvious. For example, this piece from his article is mind-boggling, "It is estimated that at least 15.4 million U.S. homeowners (~30%) will have zero or negative equity in their homes by the end of 2008."

The publication series Illinois Farm Economics Update: Impact of the Current Financial Crisis on the Agricultural Economy is available at http://www.farmdoc.uiuc.edu/index.html.

For years, I've done workshops for our own Extension staff encouraging them to enroll in the University's 403(b) plan. That's a voluntary retirement savings plan much like the 401(k) plans available for many employees of private companies. I'm always pleased when someone takes action and starts saving for retirement. But last week, I received this message:

Hi Karen,

A deduction of $80 is being taken out for retirement thru payroll and invested with "ABC Mutual Fund Company". It was just done for the first time this past paycheck. I plan to retire in probably five years?? Not sure yet.

Should I stop them taking money out because of the fear of it not being there???

Thanks,

"Babs"

I think "Babs" (not her real name, in case you were wondering) is asking a question that's on many people's minds right now, so I thought I'd share with you my response:

Dear "Babs,"

The main question is this: how long will this money be invested? Even if you retire in 5 years, you won't be taking all your money out of your retirement accounts at that time – you'll be tapping it gradually over a period of years. So most of your money might remain invested for 10 years or more. For long-term investments like that, you will probably come out ahead by investing the money in stock mutual funds or a combination of stocks and bond funds rather than keeping it in cash (like a money market account or CD). Historically, there have been very few 10-year periods (or maybe none...I can't remember for sure) that the stock market lost money. That's not a guarantee – it could happen. But losing money over longer periods like that is unlikely if you invest in a broadly diversified stock mutual fund. Investing in the stocks of individual companies, or in sector mutual funds that invest in just one industry, is much more risky.

You might think of it this way: today, you are buying stocks "on sale" (about 30% off) compared to what you were paying for them when you put money in your IRA these last couple of years. So it could actually be a good time to invest. At least, it's a better time to invest than when the market was 30% higher than it is today!

Investing through the 403(b) means that you're dollar-cost averaging: you're buying a set dollar amount of the same investment on a regular basis over a relatively long period of time. That makes the price fluctuations work in your favor. When prices are down, you will buy more shares. When prices are up, you will be buying fewer shares. It's a smart way to invest.

You might like to visit our Plan Well, Retire Well website and listen to some of the short PowerPoint segments in the section on Choosing Investments. They cover a lot of this.

Hope that helps. And I congratulate you for signing up for the 403(b).

Karen

By the way, I checked on that statistic about how many 10-year periods you would have lost money in stocks. Using data from Ibbotson, the Motley Fool says that both large cap and small cap stocks had positive returns in 59 out of 61 overlapping ten year periods.

Click on my name below to send me an email and let me know your questions about investing during these turbulent times.

Stocks, mortgages, and food prices -- all my! Sometimes I find it helpful to step back from those things I can't control (like the stock market) and think about things I can control such as saving money while shopping for food.

Food costs increased by 4.8% in 2007, and increases in 2008 are expected to be greater. In the last year common food items that many of us buy all the time have seen even greater increases: milk, 13%; white bread, 16%; eggs, 35%, and bananas, 17%. With teenage boys in our house, these kind of food price increases definitely impact our grocery spending.

Americans spend about 13% of their income on food, on average. We spend about three times more on food than gas -- even though you'd think the way people monitor the price of gasoline that it was the other way around.

So, what can we do?

Shop smart! Look at your buying habits and see if there are changes that you can make easily that won't take too much time or leave you unsatisfied. Here are some tips that I think make a difference:

1) Plan your menus ahead of time. Sit down once a week (Saturday works best for me) and plan your major meals. If I come home from work and know what I will fix for dinner AND have the ingredients in the house, then it gets cooked. But otherwise I'm much more likely to order pizza -- which is not cost-effective.

2) Look at the grocery store ads for weekly specials. I find this helps me think of things to cook too! If something is on sale that 1) you use frequently and 2) store well, then buy extra.

3) Take your menu plan and make a shopping list. A shopping list lets you shop quickly and you're likely to spend less in the grocery store.

3) Try buying store brands instead of name brand products. I've been taste-testing store brands versus name brand products with people and many people find they like the store brand just fine.

4) Be aware of the cost of convenience food. Yes, it's nice to buy vegetables pre-cut but what is the cost difference?

5) When shopping check to see if which size (box or can) is the best buy. Sometimes it's the big bag, but sometimes it's not! This past weekend I bought two small bags of rice (rather than the large bag I usually reach for) because the price per pound was cheaper than the big bag.

Do you have food shopping tips to share? Click on my name below to send your tips to me. I'd love to hear your ideas!

The stock market was Story #1 last Monday and again today with its significant swings both down and up. Newscasters were using words like "plummet" and "largest point drop in history."

What does this mean to you? What should you do, or not do? Here's a short check list.

• If you chose you individual investments as part of an overall plan, selling should be done according to a plan as well, not as a knee-jerk reaction to current events.
  • An overall plan usually specifies what proportion of your invested money should be in large US company stocks, small US company stocks, foreign stocks, bonds, etc. (that's known as your asset allocation) based on your time horizon, goals, age, etc. And you might have decided that you would re-balance (buy or sell investments to bring your asset allocation back to those proportions) at regular intervals, perhaps once a year.
• If you own individual stocks or sector funds, you are more vulnerable to market swings than if most of your investments are done through well-diversified mutual funds.
  • If an individual company goes out of business, your stock could become worthless. Individual corporate bonds simply put you in line with other creditors to see whether you can recover part of your investment. On the other hand, owning the "right" individual company stock could multiply your investment many times over. That's risk personified - a huge range of possible results.
  • Owning the stocks of many different companies through mutual funds is one way of controlling risk. It assures a return that is closer to the market average. You won't get the best return, but you won't get the worst return, either. And you're much less likely to lose all of your investment than you would be with individual company stocks.
  • Investing in a sector fund (a mutual fund that owns stocks just in one sector of the economy, such as financial companies or tech companies) has less risk than individual stocks, but much more risk than a broader stock mutual fund such as one that follows the Standard and Poor's 500, or another index.
• If you realize that you took on too much risk and have too much money invested in individual stocks, or too large a proportion of your money in stock mutual funds, what should you do?
  • One strategy for moving out of one investment and into another is to sell a set amount (a dollar amount or a number of shares) to sell on a regular basis and invest in another investment that will balance out your portfolio. See my earlier post about what to do with company stock inside a 401(k) to learn about this strategy.

If you have a plan for your investments, it's easier to evaluate events like the past two Mondays and see whether you should take action. If you're worried now, perhaps the first thing you should do is make a plan!

Let me know your strategy for dealing with the gyrations of the market! Click on my name below and send me an email.