Making It Through 2002

Investors are peering over the valley to sunny, dollar-green hills beyond. But down in the shadows, companies are still laying off workers, and new jobs can be hard to find. While you're waiting to see what's really going to happen, here's how to plan.

What's the outlook for jobs?
Expect new layoffs for several more months. Those most vulnerable are temp workers, newer hires, the least skilled and managers thought to be second-rate. Companies usually find ways of keeping managers they really want. So if you feel a certain coolness in the office air, start taking your best contacts to lunch.

Last year Congress failed to agree on extending unemployment insurance or helping fired workers hang on to health coverage. This year maybe unemployment pay will come through, but health insurance remains too controversial.

Am I carrying too much debt?
The dollar amount of both mortgage and consumer debt keeps running up. But incomes have been rising, too, so the debts aren't as burdensome as they sound. Surprisingly, the percentage of disposable income Americans spend on debt repayments has barely risen in 20 years. Most of us can afford to pay our bills. But individually, you may be underwater. In general, total debt payments shouldn't exceed 40 percent of your gross monthly income.

Is there a safe, high-interest investment left today?
Sure--start paying extra on your mortgage every month. The rate of return on those payments equals your mortgage interest rate, which is averaging 7.3 percent on a fixed-rate loan. Not bad, compared with 2.8 percent on one-year CDs and 1.6 percent on money-market mutual funds. Mortgage prepayments also advance the useful goal of owning your home by the time you retire.

Is this a good time to borrow against the value of my home?
It's a cheap way of borrowing, but are you sure you want to? This year, homeowners took equity out of their homes almost as fast as it built up. You're smart to borrow for (affordable) improvements that add to the value of your home. If you're sure of your job, you might borrow to make a down payment on a second home. But it's dumb to borrow for stuff that you use and forget. You're supposed to be treating your home as a piggy bank, not as a source of ready cash.

My 401(k) lost value last year. What should I do?
Invest more! At most companies, the max rises to $11,000 this year ($12,000 if you're 50 and up)--compared with $10,500 in 2001. The classic, prudent investment mix would be 60 percent in well-diversified stock mutual funds (not just growth funds or techs) and 40 percent in bonds. If your employer matches your contribution with company stock, don't use your own money to buy the stock, too. If your match comes in cash and you want to own the stock, limit your holding to 10 percent of the value of your account. Anything more is too great a risk.

If you're already saving the maximum your plan allows, start an IRA. Savers can now put $3,000 into IRAs ($3,500 at age 50 and up), compared with $2,000 last year.

Workers with modest incomes have a new incentive to save. You get a tax credit, in varying amounts, on as much as $2,000 contributed to a 401(k), IRA or similar plan. That applies to singles earning up to $30,000 or marrieds earning up to $50,000. Use this tax break now. It expires in 2006.

I sat out the year-end stock-market rally. Is it too late to buy?
Compared with corporate earnings, stocks are pricey now. The stocks in Standard & Poor's 500 sell at 30 times earnings. Before 1995, they never exceeded 25 times income. In a typical bull market (if that's what this is), stocks shoot up from the bottom, back and fill for a while, then gradually work higher. But every market surprises. You have to take your chance.