The Daily Herald from Arlington Heights, Illinois • Page 31

SUNDAY, MARCH 23, 2008 DAILY HERALD SECTION 3 PAttt THE WALL STREET JOURNAL LOVES MONEY In Case of Have the Cash checked the By Jeff D. Opdyke hen is an emergency not an emergency? I ask because of events of the past two weeks. They have been very expensive. Problems started on a Friday. My laptop froze; the disk drive went kaput.

When I external backup that had gone kaput, too. The cost to repair the laptop and then to retrieve the data on the backup disk: nearly $1,400. As if that wasn't enough, my Jeep started acting up the next day, with engine and steering issues cropping up at the same moment. The damage: an additional $1,200. Thus, in less than two weeks, Amy and I faced $2,600 in unexpected expenses.

Now the good news: Though it was irksome to have to pay those bills, the outlays didn't create any panic or hurt our family's monthly finances. So, my original question: When is an emergency not an emergency? The answer: When you're prepared. The idea of preparing your savings account to handle the unexpected expenses of life is one of the crucial building blocks of personal finance. It's also crucial to a sense of financial control; if you don't have that, it leads to stress and tension in the family. I know this from experience.

When Amy and I were newlyweds in the early '90s, we (well, I) never did a good job of preparing for costs we couldn't foresee. We thought we were doing fine by living within our budget and saving a little to invest here and there, but then some expense would come along that we hadn't antici- pated and our effort at budgeting and investing would be shot to hell. We'd end up draining our savings to deal with the emergency, and then have to start all over again. We felt we were gaining no ground. As the financial gatekeeper, I grew frustrated that our finances were out of balance and our savings now depleted.

That inevitably spilled over into the relationship, because Amy had to listen to my frustrations, and I had to deal with her anger that I had apparently done a poor job of planning. The tension took its toll on us. It's a situation in which a lot of families find themselves. According to the data I've seen, only of us have an emergency savings account, and of those who do, about half have less than $2,000 stashed away. Some of families don't have enough money to survive a job loss for more than a month.

That's not good. Cars break down. Teeth crack. The water heater your laptop goes kaput and you absolutely must repair it to do your job. Without a financial cushion, you're left with some very expensive options: putting the cost on your credit card and shelling out the big interest payments; taking out a loan from a bank or the provider of the service (and neither is cheap); or begging friends and family for the money, possibly imposing a cost you don't really want to pay.

I have a friend who routinely struggles with this, always juggling his bills when an unexpected cost arises, and then trying to figure out how to extinguish the debt he can't afford. Another friend, swamped by costs he didn't anticipate, sold his car and now walks to work. Having been there, I'm sympathetic. But I'm determined never to be in that position again. Putting yourself on the right track, though, is the challenge.

I'm not going to tell you it's easy. It isn't: Building an adequate emergency savings account is hard work. It takes time and patience, and the fortitude to pad the account month after month without raiding it for silly wants that seem affordable at the time but quickly add up. You don't need to have a big salary to build a financial cushion. Amy and I weren't highly paid when we determined there had to be a better way than arguing and complaining each time a surprise expense popped up.

We were new to our ca- BARRON'S INSIGHT By Gene Epstein Housing Prices Can Stall For a Long Stretch of Time espite upbeat predictions from many in the housing industry, the nationwide slump in home prices could last for a long, long if you count the toll exacted by inflation. 195,000 Nominal (left scale) 160,000 Median Home Price $230,000 $50,000 45,000 40,000 125,000 Inflation-Adjusted 35,000 90,000 55,000 i 25,000 20,000 fmmiiii 20,000 1970 '80 '90 2000 '08 Note: 2008 median home prices based on first-quarter forecast by National Association of Realtors. Sources: National Association of Realtors, Bureau of Labor Statistics Just look at what happened in the '80s and '90s. The inflation-adjusted average price of an existing home peaked in 1979, didn't bottom out until 1984 and didn't return to the 1979 level until 1995. In other words, that is, home prices went nowhere for 16 years.

Granted, inflation during that period was running at an average of 4.7%, versus 2.6% since 1995. But that doesn't mean real home prices will now fare better. Chief economist Lawrence Yun of the National Association of Realtors predicts that nominal house prices will bottom out by the middle of this year, and then resume a yearly increase. Not bad, on the possibly no better than inflation. Housing does remain a good hedge against inflation over very long periods.

Examine any 20-year stretch since 1970 and you'll find that home prices, adjusted for inflation, rose. House prices tend to rise faster than the consumer-price index over the long run be- cause the land on which houses are built is inherently not least because the availability of land has been curtailed by regulation, which is unlikely to go away. One bright spot in the housing realm: Most sales this year have been profitable for the sellers, even though the median price is down nearly in the past two years. That's because the holding period on a home is typically six years, not one or two, as the scare stories in the media often imply. That means that those who sold in early 2008, on average, didn't buy at the higher prices of last year or two years ago, but at the lower prices of six years ago.

So in both nominal and real dollars, these typical sellers made a profit. If the past is any guide, homes will continue to provide investors with solid protection against inflation for periods of 20 years or more. The problem is, a lot of us may not want to hang on to our homes for two decades. During shorter stretches of 16 asset can be disappointing. For more stories, see barrons.com Last Chance To Send a Pick idnight tonight is the deadline to enter a new Sunday Journal Investment Dartboard contest.

We'll randomly select six reader entries to battle six stocks we choose by tossing darts. Reader and dart choices will be announced April 13. The rules: Choose just one stock from the NYSE or Nasdaq markets and send your choice to the com email address. No entries by regular mail. You must include your name, address, daytime phone number, email address and the name of the local newspaper where you read Sunday Journal.

Brokers and other investment professionals can't compete. Neither can people previously chosen as contestants. You must be willing to be interviewed. Readers' Picks Off Sharply With six trading days left in Investment Dartboard Contest 29, stocks picked by readers are down an average much worse than the declines of both the dart picks and the Dow Jones Industrial Average since Sept. 28.

READER PICKS PURCHASE THURS. PRICE CHANGE SINCE PRICE reers, making relatively small wages and living in one of the most expensive regions, Southern California. Still, we opened a bank account explicitly to save for relatively minor emergencies and those once- or twice-a-year costs that always seem like an like car-insurance premiums and tax payments. This was separate from our general savings account, which was for accumulating wealth and which we'd tap only in the event of a major financial crisis like a job loss. We spent years contributing part of every paycheck.

The sums weren't huge, just $25, sometimes $50 in months we earned extra income. Whatever the case, we always forced ourselves to save something, and we never touched the account except for spending too much at the mall was never an emergency. Through the years, we've drawn on the account several times to cover unexpected bills, and we've continued to fund it every month. The amount we save has grown progressively larger alongside our income. Today, that account holds more than $12,000.

To be sure, Amy and I had to make many trade-offs along the way. For instance, we'd put money into the account rather than eating out; one dinner not eaten out can be $50 on its own. We didn't take any vacations for at least the first six years of our marriage. We lived farther away from our jobs, in less expensive housing, so that we could free up money. But the end result is worth way more than the ultimate value of our account: We can afford the broken computer and broken cars without worrying or fussing.

Jeff Opdyke covers personal finance for The Wall Street Journal. Email: HEALTH COSTS I By Rhonda Rundte Fighting Cancellations I magine spending thousands of dollars a year for health insurance, only to have it canceled after filing claims for treatment of a serious illness. Some retroactive policy "rescissions" appear unfair and arbitrary, raising doubts about the value of insurance and embarrassing the industry. Insurance companies say they need the right to void policies because some applicants lie about their health. But stung by widespread outrage over some recent cancellations, the industry is proposing a way to resolve rescission disputes between policyholders and companies.

America's Health Insurance Plans, an industry group in Washington, is advocating an appeals process involving independent review by a panel of outside experts. Decisions would be binding on health insurers. Earlier this month, the group presented the plan to representatives of state regulators, insurance commissioners and consumer advocacy groups. "It's a positive step in the right direction and provides an opportunity for prompt dispute resolution while minimizing the need for litigation," says Ron Pollack, executive director of Families USA, a Washington nonprofit consumer organization. Direct Buyers Only This issue affects people who purchase their own those who are covered under an employer-sponsored plan.

Health insurers in most states can deny coverage based on an applicant's health history. Disclosure of some preexisting conditions, such as cancer or heart disease, may result in a policy denial. But failure to do so could trigger a retroactive policy cancellation in the midst of treatment. One challenge for applicants is that sometimes the medical- history forms they must complete are confusing and difficult to understand. Minor health issues that may not seem worth mentioning, and that were never treated by a physician, may later turn out to have been early warning signs of disease.

Brokers or agents eager to complete a sale may urge a naive applicant to fudge an answer. $9.4 Million Award The insurance industry says that rescissions are rare events, but some recent cases have attracted wide notice. In February, an arbitrator in California awarded $9.4 million to a beautician whose medical coverage was canceled by Health Net. The insurer acted after she was diagnosed with breast cancer, claiming that she falsified her weight and didn't disclose a preexisting heart condition on her application. Health Net said that "while we do not agree with all of his conclusions, the arbitrator raised some serious concerns." The company said it would stop rescinding policies "without a binding external, third-party review process" and would urge California to pass legislation requiring such reviews.

WellPoint's Blue Cross of California, the largest insurer in the state, said it plans to start submitting all proposed rescissions for outside review. Connecticut, following public outcry over some egregious rescissions in recent years, has adopted a rule that requires regulatory approval in advance for all rescissions. America's Health Insurance Plans says it hopes the states will move quickly to adopt independent review as well as other initiatives to reduce the frequency of policy cancellations. "Rescissions aren't in anyone's best interest. We want satisfied customers," says Mohit Ghose, a spokesman for the industry group.

Email: forum.sunday03(3wsj.com Altria Group (MO) Rlsa Paster, The Record (NJ.) Caterpillar (CAT) Barbara J. Dollar, Peoria Journal Star Motorola (MOT) Daniel Bellon, Milwaukee Journal Sentinel SktdwrsUSA(SKX) Ronald Owsley, Salt Lake Tribune VMWaro(VMW) Ralph Silva, Sacramento Bee $69.53 78.43 18.53 22.10 85.00 VSf(VSEC) 47.28 Jack Miller, Austin American-Statesman DARTS PWC Canadian Natural (CNQ) RriHat(RHT) Sted Dynamics (STLD) Stein Mart (SMRT) T. Rowe Price Group (TROW) $15.01 75.75 19.87 46.70 7.61 55.69 $70.26 73.82 9.25 20.75 45.12 28.55 THURS. PRICE $8.02 65.21 17.06 65.77 5.73 50.63 -50 -47 -40 CHANGE SINCE -47X -14 -14 -25 -94 Source: WSJ Market Data Croup MARKETWATCH By Jonathan Burton Retirement Funds: Invest More Now alling stocks are roadblocks to a comfortable retirement. At times like this, when the path looks especially rocky, it's tempting to reduce your regular contributions to a 401(k) account or other automatic investment plan.

In fact, with U.S. and international stocks both down sharply this year, it's actually a prime time to boost your commitment to these all-terrain retirement vehicles. Take a bit extra from each paycheck, buy more shares at lower prices, and let the market's long-term upward trend do the rest. "It's a practice that almost all the great investors have used," says Christine Benz, director of personal finance at investment researcher "They've taken advantage of short-term market panics. It's a sensible strategy for smaller investors to emulate." Of course, anyone just a few years from retirement shouldn't pile on stock-market isn't enough time to recover from losses.

But this recent turmoil has also rattled the bond market, where the same "buy low" strategy applies. "If you can afford to contribute more, I would tell you to increase it in any market," says Sri Reddy, head of retirement strategies at ING. "Participate as much as the plan will allow." Stick to the Plan Increasing payroll contributions to a retirement plan, regardless of market conditions, will likely earn you more over time. Consider two hypothetical 401(k) investors who stashed $1,000 in a Standard Poor's 500 index mutual fund at the end of 1997. Initially, they each added $100 a from salary and a $50 employer this all-stock portfolio.

A decade later, that approach brought the account's value to about $17,500, according to investment researcher Lipper. During this period, the U.S. market went through an uplifting bull market and a punishing bear. Indeed, it was still a dark time for stocks at the end of 2002, when one of these now earning a bigger her monthly contributions to $75 with an equivalent employer match. That decision proved lucrative: At the end of 2007, this worker amassed a retirement portfolio worth $21,000.

Even better, the automatic nature of these plans takes the emotion out of long as you don't tinker with it. Through what's known as dollar- cost averaging, you're buying more shares in down markets and fewer in up markets. The important thing is that you're in the game; once you slip out of retirement-savings mode, it's hard to get back in. "The worst thing that can happen," says David Kudla, chief investment strategist at money manager Mainstay Capital Management, "is that someone who has a long-term strategy designed to meet their goals and time horizon lets short-term market volatility cause them to waver." Stay Balanced Yet with rising prices at the supermarket and the gas pump, an uncertain outlook for jobs, and the pressure of mortgage payments on homes that have lost value, many Americans are stretched thin. A 401(k) may be a lifetime plan, but to many people at this moment it's a piggy bank to cover the bills.

Focus on the big picture. Trimming retirement contributions puts more money in your pocket, but you'll have less once you stop working, and you may even have to work longer to make up the difference. Look for ways to cut spending or con- sult with a credit counselor before you slash savings. "Turning to 401(k) money is not a reliable long-term solution to your debt problem," says Gerri Detweiler, a credit expert with Credit.com. "It's better to leave it alone and look at your other options." "By decreasing contributions now, you're giving up a long- term retirement nest egg," adds Dean Kohmann, a vice president of 401(k) plan services at Charles Schwab.

"Whether the market goes up in one year or three years, you're still better off staying invested." Target-Date Funds That's difficult advice for a lot of folks to swallow, even if they have money td spare. Many investors are scared to stay in stocks when prices are tumbling, let alone buy more. One way to keep your footing is by investing in target-date retirement funds, a staple of many 401(k) plans. These broadly diversified mutual funds follow a preset "glide path" that trims exposure to stocks as your retirement date approaches. For example, Vanguard Target Retirement 2015 Fund (VTXVX), geared for people close to retirement, recently kept a mix of stocks and bonds.

In contrast, Vanguard Target Retirement 2025 Fund (VTTVX), designed for people in their late 40s with longer time horizons, has about in stocks. Vanguard's target-retirement funds, which have varying dates currently going up to 2050, are highly rated by Morningstar, which also praises T. Rowe Price Retirement 2015 Fund (TRRGX) and others in that fund family's lineup. Other leading fund companies such as Fidelity Investments and American Funds also offer their own retirement funds. "Many of these funds are constructed with a solid underpinning of asset allocation," Morningstar's Ms.

Benz says. "If you ratchet up your allocation in your 401(k) plan and your money is going to at least a few well-diversified funds, you're spreading the risk that one lousy pick will sink the snip." Read more at marketwatch.com.