7 Tips for Seniors for Managing your Money in Tough Economic Times

By: Skip McGrath
Head Geezer ~ Official Geezer Guides
December 2008

Times are tough for everyone, but this economy is especially tough on seniors and those with fixed incomes. It has also hit older Americans who are looking to retire in a few years. The biggest problem is uncertainty - no one knows how this will all play out.

I subscribe to several financial newsletters and all of the top business magazines including Fortune, Forbes and Investor's Business Daily. The one common theme that comes from all of these experts is that there is no common theme. Some of them are forecasting deflation, others are forecasting huge inflation and a few are forecasting a return of Stagflation like we had in the days of Jimmy Carter. So given that no one -even the experts can predict what will happen in the months ahead, here are some things you can do:

1.Keep your money safe - I am parking my money in safe places like Treasury bills, Tips Treasury bond funds and money market funds. I am holding a little Gold (Street Tracks Gold Fund (GLD) as a hedge against inflation but that is about it.

I think we will know more after the first of the year which direction the economy will take but until then I would advise caution. Keep your money in investments that pay whatever yield you can get but that are safe from large drops. I still have a few stocks -and they are down, but they are all long-term holds that pay a good yield while I hold them. Any yes the market will eventually come back and there are some great bargains out there that will rally strongly when the market does return -but that is a game for younger people. If you are already retired or about to retire soon, what you want to do now is keep your money safe.

2. Reduce Debt - When credit is tight interest rates rise. In uncertain economic times one of the best things you can do is reduce your debt. Start with your credit cards and then get on your car loans. Once these are down or gone make extra payments on your mortgage. When you are on a fixed income any debt you can reduce increases your free cash flow -or spendable income. With investment yields as low as they are now, if you are putting money away for savings and earning 1.5% interest, you would be better off using that money to pay off loans or credit cards that may have interest rates of 10% -15% or more.

3. Raise Cash - We are entering a period where cash is king. If you can find extra cash you can use it to pay off your debts or use it to purchase things you need without putting them on a credit card. Look around your house. Everyone has something they don't need any more. It is too cold this time of year for a garage sale, but you can sell things on eBay or Craigslist. If you have stuff you can part with that won't sell is it something you can donate to a thrift shop. If you pay taxes, gifts to thrift shops are tax deductible. If you have any taxable income at all these tax deductions can really add up.

4. Control your generosity - I am not advising you to become a scrooge, but take a look at what you are spending on others -and think about cutting back a little. We still make a pretty good income and can afford nice Christmas gifts for the kids and grandkids and we always enjoy giving them stuff -but this year we cut back. We still gave them some nice things but we were not as extravagant as perhaps we were last year. And we asked them to please not spend a lot of money on us. I do have friends whose older kids actually mooch off of them and they just can't seem to say no.

5. Start a budget and stick to it -There is an old saying that you can't budget your way out of debt, but just having a budget makes you think about it every time you spend money. It can also make you feel better. I have a good friend who retired a few years ago and has really struggled trying to live on a fixed income after years or earning a good income. She was actually becoming depressed and all of her friends were noticing it. I helped her set up a budget. The biggest change was that she actually felt better when she was done. Just the act of getting all her bills and expenses down on paper and planning her spending out gave her a feeling of control. Her mood and attitude changed overnight and all of her friends could see the change.

6. It's never too late to hire a financial planner - If you are already retired or about to retire, ideally you would have hired a professional financial planner years ago. But most people didn't. It's not too late. A professional financial planner can help you save money, reduce taxes, protect your investments and help with your estate planning. Besides protecting your retirement income this can also give you piece of mind.

7. Get ready to refinance your home - As this is written the Federal Reserve is moving into the markets and buying up debt. Although eventually this will cause inflation and rising interest rates -in the short term this is lowering home mortgage rates. Rates have dropped to 5.2% and are headed lower. I have read some forecasts that they could go as low as 4% and even some financial gurus predict rates as low as 3%. When Japan did the same thing our Fed is doing now, mortgage rates in Japan dropped as low as 1.5%. I don't think that will happen here because the pressure of the multi-trillion dollar bailouts will eventually put pressure on rates, but we could see a brief window where rates really drop. If they do, be ready to jump on refinancing.

Money is tight, but there is plenty of mortgage money out there if you have at least 10% equity in your home and good credit. So now is a good time to pay down your debts which will improve your credit rating.

If you currently have a 6% loan on a balance of $200,000 you are probably paying around $1500 a month including your property tax and insurance. If you refinance to a 4% loan, your monthly payments will drop to around $1165 -a savings of $335 a month. You could either use the $335 a month to live on or put towards investments. Or if you paid that savings every month towards principal reduction, you would pay off you loan in about 7 or 8 years.