“Bank of Dad” is a weekly column which seeks to answer questions about how to manage money when you have a family. Want to ask about college savings accounts, affordable date night ideas, or where to buy toys on the cheap? Submit a question to Bankofdad@fatherly.com. Want advice on what stocks are safe bets? Ask your broker. And then tell us. We’d love to know.
It’s hard to sit back while the market takes a dive like it has over the past month. Is now the time to switch toward more conservative investments? — James L., Portland, OR
Guys tend to be problem-solvers. When our kid’s toy breaks in two, we’re out there with the super glue in hand to undo the damage. Other times, though, springing into action can backfire. A temporary dip in the market is a case in point.
Nobody likes to see their hard-earned nest egg take a hit. But the tendency is to dump your stocks when they’re at a low, which is the opposite of what you want to be doing. This is one time when you need to keep your fix-it mentality in check.
For starters, stick to rules-based rebalancing, says Rick Vazza, a financial advisor with Driven Wealth Management in San Diego. For most folks, that means you only readjust your allocation of asset classes on a strict calendar basis — say, once a year — or when your allotment of stocks is off by a certain amount. “You want to be making decisions on your terms, not the market’s terms,” says Vazza.
Let’s say, based on your age and retirement goals, you set up a portfolio comprised of 75 percent stocks and 25 percent bonds. If the market takes a tumble, that ratio could suddenly be 70 percent stocks and 30 percent bonds. So when you rebalance, you’d actually buy more equities to keep things in balance. And, of course, the opposite would hold true in a bull market. The result: you’re buying low and selling high – it’s Investing 101.
It’s also important to keep things in perspective. During the month of October, the S&P 500 is down about seven percent. But on the year, it’s pretty much flat. So if you’re rebalancing once a year, you may not need to do much tinkering with your investments.
I know about having a rainy day fund and a decent savings account. But what are some other, less discussed, signs of good financial health I should consider? — Brian S., New York City
Checking out your finances is sort of like getting a physical at the doctors. Slapping on the blood pressure cuff doesn’t tell the whole story. You need a complete workup.
A solid emergency fund is a good start, but I’ll throw out a few more tests as well. Your debt-to-income ratio (DTR) is one of them. The logic here is pretty simple. The more money you bring in, the more you’re able to handle your credit – and that includes everything from student loans to your Visa card. It’s no wonder that DTI is one of the main factors lenders look for when underwriting bigger loans. You’re generally in good shape if you’ve got it below 35 percent, but a lower ratio is better still.
Related to that is cash flow. It sounds like something only corporate accountants have to worry about, but it’s important stuff for your household, too. If you’re not bringing in more income than you’re spending, you’re not able to save for the long-term, which is obviously the goal. In fact, you’re going to deplete whatever savings you already have – or continue to dig yourself a bigger hole if you’re leaning on your credit card. So if you have negative cash flow, do whatever you have to turn it around, and fast.
Then there’s your credit score, which determines how expensive it’ll be to take out a mortgage or get a car loan going forward. It’s also a rough indicator of how you’re using credit. If you’re overextending your revolving accounts, or regularly missing your due dates, it’ll show up in your FICO number.
Also take a look at your retirement savings rate. If you’ve managed to divert at least 15 percent of your income toward a 401(k) or IRA, starting in your 20s, you’re probably in pretty doing just fine. Keep in mind, though, that’s a pretty loose target. If you didn’t exactly get out of the gate running when you entered the workforce, you may want to kick in a little more to make up for lost time.
Last, but not least, find out how you’re doing in the risk management department. If you’re raising a young family, do you have life insurance that’ll protect them against the unlikely, but nonetheless real, possibility that something could happen to you? Do you have disability coverage that will guarantee sufficient income if your family’s breadwinner gets hurt? If not, it’s probably time to shop around a bit.