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By GEORGE MYERS JR.
Staff Writer 10/09/2008

The sinking stock market has erased trillions of dollars from retirement accounts. Unemployment numbers are growing. So are fears that heating costs will push many Mainers to bankruptcies this winter.

Meanwhile, hundreds of economists predict that we’re entering a deep recession, and potentially worse, with more-limited opportunities to acquire loans.

What do we do with the savings we have now?

The answers follow, courtesy of Mark L. Johnston, president and CEO, Kennebec Savings Bank; Allan L. Rancourt, president and CEO, Kennebec Federal Savings; and John C. Witherspoon, president and CEO, Skowhegan Savings Bank.

Q: What should I do about my money right now?
Johnston: “Review your present savings and investments to be sure that you have made the best decisions on where your funds are held. It is particularly important to look at your funds that are short term (less than five years) differently than long term (at least five years). Shorter-term funds should be invested more conservatively than longer-term funds.”
Rancourt: “This economic environment dictates you to preserve your money, not speculate chasing high interest rates. You want safety and liquidity. A KFS-insured bank account would be my recommendation.”
Witherspoon: “Assuming you had a plan for your funds prior to the recent downturn, you should stick with it. It’s advisable to hold six months of living expenses in liquid (cash-like) funds.”

Q: Are my investments and savings account safe?
Johnston: “In all likelihood, yes, but it depends on where your funds are held. It is certainly no time to have uninsured deposits in a bank that you are unfamiliar with, or investments with a broker that you know very little about. It is entirely possible that your investments have lost some value but so long as your investments are well-diversified, the loss is likely to be temporary and only on paper (unless you decide to sell them).”
Rancourt: “Depends on the investments. One should talk to your financial advisors and plan a course of action. Most savings accounts are insured by the FDIC. So, confirm that your bank is insured by going to the FDIC web site (www.fdic.gov/bankfind) or by calling 10877-ASK-FDIC.”
Witherspoon: “Savings accounts in banks are now insured for up to $250,000, and most of Maine’s community banks have significant levels of capital that provide additional safety. Investment accounts are, by their nature, riskier but should remain a part of someone’s long-term investment strategy.”

Q: I'm 55. Should I cash out my 401K?
Witherspoon: “No! There is a 10 percent IRS penalty as well as a tax liability for the funds received, which are treated as income. It would be better to borrow against the 401K if the plan allows, or from a bank.”
Rancourt: “No, no and no. It's natural to be concerned in these uncertain economic times. However, cashing out your 401K would have unwanted consequences, including taxes and penalties. Consider reviewing the mix of investments in your 401K and reallocating to balance and diversify your investments to a mix that's right for you. Talk with your 401K provider to discuss options and get information about your specific investment options.”
Johnston: “Most plans do not allow you to cash out at age 55. However, it is a good time to review how your 401K funds are being invested. It is very important to make sure that you have a broad diversification of your funds, among different asset classifications. You should be particularly careful about a concentration of assets in the stock of the company for which you work, even though you may be encouraged to do so and even though the stock may have done well during the past. Those Enron employees who had their 401K funds invested in Enron stock certainly learned about this the hard way.”

Q: Is this the time to buy a home, or a car?
Rancourt: “It's a great time. Good selection of homes to pick from, many motivated sellers and loan rates are low. It's the same scenario for buying a car. Don't be afraid to negotiate. A KFS-experienced loan officer can provide assistance with determining your best financing options.”
Johnston: “It could be. However, I would not buy anything major if it meant that I had to liquidate investments at a loss.”
Witherspoon: “If you are in the market for a home, this is a great time, as prices are down, there’s plenty of inventory, and interest rates are still attractive. It’s also a good time to buy a car, assuming you need one.”

Q: Is this the time to seek a college loan?
Johnston: “Shorter-term rates are actually very low right now and college financing is typically based on short-term rates, so now is as good a time as any.”
Rancourt: “Yes. Access to college-loan funds is available through customary sources such as Sallie Mae and Federal Family Education loan Program.”
Witherspoon: “Higher education is directly linked to higher incomes, so college is a good investment in oneself. There are federally backed student loans that are reasonably priced. I would suggest someone looking for college financing to call the Finance Authority of Maine.”

Q: Is it true the FDIC insures only $100,000 worth of one's savings?
Rancourt: “Last Friday, President Bush signed the Economic Stabilization Bill, which immediately increased FDIC deposit insurance coverage from $100,000 to $250,000 per depositor per institution. Depositors may qualify for more than the $250,000 in coverage at one insured bank if you own deposit accounts in different ownership categories. The most common account ownership categories for individual and family deposits are single accounts, joint accounts, revocable trust accounts and certain retirement accounts. More information is available at www.fdic.gov/EDIE.”
Johnston: “The FDIC recently increased its insurance limit per individual per bank from $100,000 to $250,000 until at least Dec. 31, 2009. Joint accounts are insured up to $500,000. With the proper titling of accounts, a married couple can insure up to $1 million in one institution. The FDIC has a great calculator on its web site that helps consumers on how to maximize FDIC insurance (www.fdic.gov/edie).”
Witherspoon: “The FDIC insurance was just increased to $250,000, and there are ways for couples to get coverage up to $1 million or more. People should consult with their banker.”

Q: I have $5,000 in my checking account and want to earn a higher rate of interest on it. In what kind of account should I put it?
Johnston: “To earn a higher rate of interest, you should consider moving the money you don’t need for cash-flow purposes into a money-market savings account or a certificate of deposit. These account types typically earn higher rates of interest than transactional-checking accounts.”
Witherspoon: “As with most investing, it depends on the goal and availability of other funds. But generally, a CD will pay a higher rate of interest.”
Rancourt: “A KFS Rewards Checking account offers premium CD-like rates and ATM fee refunds nationwide with no monthly fees. Alternatively, CDs, and bank money-market accounts generally pay a higher rate of return than most other checking accounts.”

Q: Should I expect the interest rates or minimum payment on my credit cards to go up?
Johnston: “No, not right now. Interest rates on credit cards are often tied to the prime-lending rate, which has been going down since September of 2007.”
Witherspoon: “No, in fact many people are anticipating that the Federal Reserve will lower short-term rates, which would impact loans tied to the prime rate and some credit-card rates. Mortgage rates are not controlled as much by Federal Reserve Policy, but should go down unless the market anticipates higher inflation.”
Rancourt: “It is impossible to predict what credit-card companies will do. I do think it's important to pay your monthly payments on time, as agreed. If you miss a payment or make a late payment some card companies will automatically increase your rate and charge you a fee. So, pay on time.”

Q: My monthly expenses are more than my income. What debt do I pay down first?
Johnston: “Generally speaking, you should first pay off the debts with the highest rates of interest and/or the ones that have the highest monthly payments. Normally, focusing on credit cards first is the best approach.”
Rancourt: “It may be possible to combine some of your debt to make you monthly payments more manageable. Visit your community financial institution to review your financial situation, and determine your best options.”
Witherspoon: “Generally, you should pay your mortgage debt first, and credit cards last. A person should work with their banker to see if they can refinance and consolidate debt to lower payments.”

Q: Should I risk setting up a biweekly mortgage payment with my credit, food, gasoline and fuel bills expected to go higher?
Johnston: “Biweekly loan payments can be a convenient way to budget, if you get paid weekly or biweekly, and they generally save you a considerable amount of interest over the life of the loan. However, a biweekly loan requires more dollars in loan payments per year than a monthly loan. Maine law allows borrowers of biweekly mortgage loans to change from biweekly payments to monthly payments once during the life of the mortgage without any penalty. It should be considered if you having trouble making your loan payments.”
Witherspoon: “A biweekly mortgage payment is a great way to reduce debt without much pain, since in most cases the payment comes directly out of one’s paycheck.”
Rancourt: “These mortgage loans do result in you paying the equivalent of one extra mortgage payment per year. If your financial circumstances allow for that, the term of your mortgage loan can be reduced with a biweekly payment.”

Q: Should I apply for a couple more credit cards, to charge things on, in case of an emergency?
Rancourt: “It is always wise to avoid taking on additional debt, if possible. KFS and other community financial institutions are here to help with your short-term borrowing needs. I think it to be a wise move to set aside enough money to cover six months of expenses in case of an emergency.”
Johnston: “It is not usually necessary to have more than a couple of credit cards. More credit cards generally lead to more credit-card balances, which can lead to financial problems. Credit cards should not be used to supplement income.”
Witherspoon: “No, I would suggest that it would be better to cut out all unnecessary payments (cell phones, cable TV) and put away the savings in an emergency account.”

Q: Should I buy canned food for storage? How bad will this economic downturn be?
Johnston: “No one can accurately predict the financial future, but I do not think stockpiling canned food will be necessary for economic reasons. It is, however, always a good idea to have some canned food on hand as another Maine winter approaches.”
Witherspoon: “It’s hard to say how long or deep the economic downturn will be, but in spite of the headlines, our unemployment rates are still not at a severe level, so if your job is stable, you should not panic.”
Rancourt: Ah ... Saturday night family dinners of B&M baked beans ... Those are fond memories but, no, I wouldn't start buying canned food to stock in my 1950s basement bomb shelter. The U.S. economy will rebound. We just don't know when.

George Myers Jr., 861-9127
gmyers@centralmaine.com

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