Is the Good News Bad?

I know last week’s financial tip indicated that people are worried about their credit, instead of their savings.  My strong belief in saving and my personal preference toward the future might have gotten me out-on-a-limb.  This month, the Federal Reserve Bank reported that in November the total borrowing dropped by $17.5 billion, a much larger decline than the $5 billion that had been predicted by my economic brethren.  This is the biggest drop in credit, since 1943, the year they began to keep records.  The largest drop was in credit cards which fell by $3.7 billion.  This was an 18.5% decrease, compared to November, the largest decline since a 29.6% decrease recorded in December of 1974.

 

The indications are that people are borrowing less, as a result of fear of (or actual) job losses.  In December, employment did decrease in our country with a decline in 85,000 jobs, although the unemployment rate remained constant at 10%.  Employment was seen to particularly fall in the industries of construction, manufacturing, and wholesale trade, while increases were recorded in temporary help services and health care.  More can be read at the Bureau of Labor Statistics. (Click here for more information.)

 

To make matters worse, there is mounting evidence that banks are increasingly reluctant to lend money, as many banks have tightened lending standards.  Fannie Mae and Freddie Mac have tightened their rules, by limiting lending solely to consumers, as opposed to developers.

 

At the same time many are recognizing the need to save more, in order to replenish their portfolios.  Remember a few months ago we mentioned the Paradox of Thrift by Lord Keynes, where people tend to save at the precise times when the economy needs them to spend more.  The American consumer accounts for 70 percent of all economic activity (and is the reason for all economic activity) and when the consumer cuts back, the economic shrinks.  I also pointed out that, while others are spending, those that save can make a personal difference in their futures.  Hence, there truly is a paradox of savings.  So, what is my tip, in the context of this information?

 

The main thing is to stick with your savings plan, if you have one.  If you don’t have one, start one.  The fact that credit is being reduced may slow the economy but the fact that there is cash on the sidelines or in the banks, indicates that money will continue to be inexpensive for a while (i.e., low interest rates) and that eventually money will come off the sidelines and be employed in productive investments.  Knowing this, if you continue a well diversified investment program, such as through index mutual funds across various investment classes, you should be fine and will eventually reap rewards.  Use dollar cost averaging to reduce risks further, if you are just beginning to get in the market. For those that are risk averse and afraid that the government’s borrowing will lead to inflation, consider TIPS, otherwise known as Treasury Inflation Protection Securities. TIPS pay a relatively low rate of interest, yet Treasury Inflation-Protected Securities are marketable (meaning you can sell them to others) securities whose principal is adjusted every six-months by changes in the Consumer Price Index. When inflation occurs, as measured by the CPI, the principal amount of the TIP increases by the same percent as the rate of change in inflation. In the event of deflation, where the CPI falls, the principal decreases.  The point is that they are guaranteed by the US Government and they are “inflation-proof”, while fixed-payment and fixed-principal bonds are not.

 

So, is the Good News Bad?  I’d say the answer is “No” - not if your focus is on your disciplined plan toward your financial success, rather than today’s latest fear - or greed - news.

 

GOOD NEWS ITEM:  Ryan Law is now employed as our Director of the Office for Financial Success.  He comes to us by way of Texas Tech University.  I expect you’ll have a chance to learn more about him, as he joins us in our mission of helping others find success in their financial lives. If you have ideas for him, send him an email: lawr@missouri.edu .

Your Financial New Year

An article by Karen Blumenthal appeared in the 30 December 2008 edition of The Wall Street Journal. It caught my eye and engaged my brain.  She is a favorite author of mine.  Her down-to-earth approach to personal finance provides fertile ground for my Midwestern roots.  In that article, she took the holidays of the year and focused on an action households could take to fix their finances in 2010 that “fit” that day.  In a similar vein, the National Foundation for Credit Counseling released their survey of the financial New Year’s resolutions of 6,100 households.  The results of the survey reveal that NFCC’s respondents might find Blumenthal’s prescriptions to be distasteful – as are many good “medicines”.

 

The NFCC found that the number one New Year’s resolution for households ranked as follows, each with the percentage that chose that action as their number one resolution.  (The press release is attached.)

 

                Decrease debt                                                                  76%

                Improve my credit score                                               11%

                Decrease dependence on credit cards                     7%

                Increase savings                                                                 6%

 

This is disheartening.  While decreasing debt is certainly admirable and some would say reducing debt is a form of savings, as it improves one’s net-worth, the fact that only 6 of 100 households ranked increasing savings as their number one priority for 2010 is much less than I would have imagined.  This is particularly true, given the events of 2008 and 2009.  Moreover, the fact that fully 94% implied that they had issues with their credit behavior is frightening.  While it is challenging to accomplish, most financial planners suggest that we should save, at least, 10% of our income for retirement, emergency planning, college savings, and other goals.  So, since most of us don’t, what can we do to celebrate the holidays of 2010?  (My gratitude goes to Ms. Blumenthal for providing the idea.)

 

New Year’s – Vow to increase your rate of savings.  Have money automatically deducted from your paycheck and put in your retirement plan, your savings account, your money market fund, or other accounts dedicated to your goals.  Do this today, if you haven’t already.

 

Martin Luther King’s Birthday – To celebrate the diversity of our country, review your investment plan to make sure it is diversified – across sectors, industries, market-capitalization, countries, etc..

 

Presidents’ Day – Reduce your borrowing.  (Since politicians have trouble with this one, why not use their day as the day to take actions that are the opposite of theirs?)

 

Religious Holidays – Whether you celebrate Easter, Mawlid-al-Nabi, Shavuot, the Equinox, or other religious holiday, take some time to celebrate your birth and heritage.  Consider the financial lessons, good and bad, that you have learned from your family, friends, and religious affiliations.  Do your best to practice the “good” and to cease practicing the “bad”.   It will build human capital in you, your most precious asset.

 

Memorial Day – First, be grateful for the sacrifices of others that have allowed us to have our freedom and, then, talk to your family about estate planning. Make a plan for your own death – it will happen – that incorporates your goals for giving to others.  Make sure you know the plan of your parents and, if they don’t have one, suggest they get one.

 

Fourth of July – Ask yourself if you are financially free.  The American Revolution occurred because we did not want to pay taxes, without representation.  Many have chosen to be servants to those to whom they owe money.  In a sense, they have voluntarily sacrificed their freedom, in exchange for working to pay interest.  Choose freedom.

 

Labor Day – Remember what Ben Franklin said, “At the working man’s house, hunger looks in, but dares not enter.”  Good work is a blessing and protects us from recessions and economic change.  Our gift to our economy is our labor and creative contributions working together to increase the well-being of all.  Moreover, those that work hard with specialized training and unique personal skills will always be valued.  Hunger will not knock on your door, if your house is built on productivity.

 

Thanksgiving – While Thanksgiving is my favorite holiday, giving thanks for what we have is a key to making financial progress.  Make a list of what you think you need, as well as what you want.  Focus on your goals and your needs will become clearer and will be satisfied.  Focus on your wants and you’ll always want more.

 

Christmas, Bodhi Day, Hannukah, the Winter Solstice, Id al-Adha, or Yule – First, look up which group celebrates each of these holidays.  Then, every day before the next Holiday season, remember the gift of giving and what truly matters.  The best day I ever had with my father was a late-fall day spent duck hunting and we did not kill a single bird.  Or, was it one of the days we spent together working with his business? My children remember trout fishing, while not remembering that very expensive meal at the restaurant on Broadway in New York.  Remember, happiness and satisfaction are not “pricemore”, they are priceless.

 

Happy New Year.  May yours be a financial success.