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What You Should Do Now
by Gary Foreman
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What You Should Do Now
"Never make predictions, especially about the future." - Casey Stengel
For years Casey Stengel managed in baseball's big leagues. Some of his quotes are legendary. But, given our current economy, I'd have to take exception to his advice. At least as it applies to our personal finances.
Let's look at some current information. Unemployment is at 9.8%. Nearly double what it was at the beginning of 2009. Hiring remains anemic.
The Congressional Budget Office (CBO) estimates that the fiscal year 2009 U.S. deficit will be $1.4 trillion. That's just under 10% of gross domestic product. Or to put it into perspective, during the last year, the government borrowed the equivalent of 10% of every good and service the whole country produced.
There were over one million bankruptcies through September 2009, according to U.S. Bankruptcy Court. At that pace, we'll see 1.4 million this year.
Forecasts for the economic future vary widely. Despite old Casey's advice, you can find reputable economists who are willing to predict both recovery and a more serious recession.
So, while there is much uncertainty, there are still some things that you can reasonably predict about your personal finances.
First, you can expect some inflation. Over the long term, there's only two things that can be done with the deficit. Congress can adjust future budgets to repay it quickly. Or they can devalue the dollar to pay it back with cheaper dollars later. Based on past experience, I'd say that they won't vote to repay it soon, so we better be prepared for some inflation (i.e. devaluation of the dollar).
What will that inflation mean to you? It will mean that it will take more dollars to buy things. Bread that cost $2 today will cost $3 tomorrow. If your income does not keep pace with inflation, you'll suffer. Those on fixed incomes will be hit hardest.
Inflation can also devalue your savings. Whatever amount you planned for an emergency fund, college savings or your retirement won't be enough. You'll need to adjust your savings goals upward.
You'll also want to change the way you invest your savings. Reduce the amount that you have in CDs and money funds. Look to increase the portion in assets with prices that can increase. For instance, consider natural resources (oil, gold, etc.) and housing.
Look for ways to increase your income. That may mean creating a second income source. It will be hard for many employers to raise your wages to keep up with inflation. Your pay could lag behind increasing prices.
Expect interest rates to increase. The government is borrowing more than ever before. You'll be competing with them for loans.
That means that you should pay off any debt where rates change with the market. A homeowner's line of credit is a great example. As rates go up, so will the cost of your HELOC.
Expect credit card rates to rise. First, because of generally higher interest rates. Secondly, because the credit card reform bill of 2009 is forcing issuers to try to make more money from people who pay their bills on time. So instead of clobbering those who fall behind, card issuers will expect everyone to pay a little higher interest.
They'll also increase fees and reduce rewards. Much of that has already started. A good response is to slowly cancel cards you don't use, especially recently opened accounts. Do this cautiously. Closing too many accounts too quickly could reduce your credit score.
If you have any other variable short-term debt, pay it off as quickly as possible. If the rates are adjustable, be prepared for them to go up.
Now might be a good time to consider refinancing your house. Locking in lower rates today is a good idea, especially if you plan on being in your home for more than a couple of years. Bankrate.com has a good tool for comparing mortgage rates here.
Think about what you would do if you lost your job. You may be fortunate and have a job that's secure. But most of us need to be prepared for either a pay cut, unpaid days off or even a layoff.
For instance, training for additional skills while you're still employed could be helpful. You'll find a whole list of things to do if your job is uncertain here.
Old Casey was right when he said it was hard to predict the future. No one knows for sure how long or rough this economic storm will be, but don't let that keep you from taking the appropriate steps now.
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Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.
Take the Next Step:
- Prepare for interest rate hikes by aggressively paying down credit card balances and variable-rate loans.
- Prepare for inflation by evaluating your savings and investments with a financial planner. You can also find some good resources at www.fidelity.com and www.vanguard.com.
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