Thursday, March 11, 2010

Living with "The Deficit"

No matter how much we try, we cannot ignore the growing federal deficit.  Even if we are not personally bothered by it, we are unable to listen to the radio, watch television, or engage in conversation with our friends without hearing someone talk about the deficit.  Yes, it is HUGE.  Take a look at these pictures I downloaded from the internet and you can see that the annual deficit is very real and our national debt is growing rapidly.  While I do not want to make you feel bad on a Friday morning, with 307 million Americans, the amounts equal to about $6,000 in debt added for each of us during 2009, with a total per person federal government debt of over $40,000 per person.  (I’m sorry to break this to you, particularly when some of you are still in high school.) (Source: http://www.kowaldesign.com/budget/ )

 

US Federal Budget Deficits and Surpluses

 

 

US National Debt

 

 

Given these pictures, it is prudent to ask the question, “What should I be doing with my money?”  To answer that question depends on what happens in the future and, since I lost my license as a fortune teller some years ago, we should think about what is likely to happen and, if it does, what we should and shouldn’t do with our money.

 

Three scenarios are talked about, when economists peer into their crystal balls.  The increase in government expenditures is generally expected to cause one, or all, of the following: Inflation, Higher Taxes, and/or a Weaker Dollar.  We’ll take each in turn.

 

Inflation

 

Do:

·         Buy Treasury Inflation Protected Securities (TIPS), loans to the US Government where their value rises with inflation, while they pay you a low, real rate of interest.

·         Buy a home or other real asset, whose value will increase with inflation.

·         Buy the common stock of companies who have a large base of real assets.

·         Delay repaying mortgages, if you have a fixed-rate mortgage, as the inflated dollars for future payments will be worth less

Don’t:

·         Keep your money in checking accounts, savings accounts, or other dollar denominated, inflation sensitive assets.

·         Be driven by fear of the future to keep you from making decisions to support your family and your goals.

 

Higher Taxes:

 

Do:

·         Look for ways to take capital gains now, while taxes are lower.

·         Convert your traditional IRAs to Roth IRAs; pay the taxes now, while taxes are lower.  (As long as the law doesn’t change, Roth IRAs are taxed now but not at withdrawal.)

·         Consider purchasing tax-free municipal bonds to protect you from higher taxes.   Moreover, if taxes increase, the bonds will become more valuable in the bond market.  (Focus on general purpose municipal bonds, as opposed to revenue bonds.)

Don’t:

·         Send your money overseas.  There is a large movement to reduce the advantages of overseas accounts.

·         Make your decision solely based on taxes, as other factors should determine the time to buy or sell assets.

·         Complain about the government, if you are not willing to work toward change.  Get involved and try to make a difference in the world we live in and the future we face.

 

Weaker Dollar:

 

Do:

·         Buy foreign securities, stocks and bonds.  Focus more heavily on companies that do not depend on exporting to the United States, such as companies that are crucial to any country’s infrastructure; communications, food, transportation, utilities, etc..

·         Focus you domestic investments on companies/sectors that export American goods or with large international operations.

Don’t:

·         Give up on the dollar.  America has proven herself over the past 200+ years to be the cornerstone of the world’s economy.  She’ll (i.e., “We’ll”) be very reluctant to relinquish that role.

 

Clearly, I don’t know what the future holds.  Each of us only knows what we want our future to be and we make decisions each and every day which either support our dreams for financial success or work against our dreams.  One of my students, Kelley, sent me an email yesterday and I noticed her signature line was a quote from Abraham Lincoln.  He said, "The best way to predict the future is to create it." 

 

I say, “Do It.”

 

Robert O. Weagley, Ph.D., CFP(R)

Chair

Personal Financial Planning

241 Stanley Hall

University of Missouri

Columbia, MO  65211

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