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The Year is Half Over; Where is the Economy?

The Year is Half Over; Where is the Economy?

Let’s begin this column with a review of the last twelve months in economic terms with recaps of my articles since June of 2009.

A quick review of some or all of my columns written over this period will give you a renewed perspective on the importance of your continuing financial education. Much of what has been written here has come to fruition, and I believe being forewarned is being forearmed.

We have had a close focus on personal financial management since the inception of the “Your Life and the Economy” section of the web site. My hope is that many, if not most, of our readers have gained some insight into their personal financial health as we examined many of the ongoing economic issues which impact the global economy. We have discussed the Chinese economy, the economic peril facing Greece, Italy, Spain and other European countries, and the impact of domestic unemployment and very low personal savings rates of American consumers. We have looked closely at interest rate policy as implemented by the U S Federal Reserve Bank, and the comparative strength of the US Dollar to other global currencies. I’m sure many who have followed this month to month tutorial are still amazed at all of the “moving parts” which impact our economic well being.

Whether you have taken the time to review, or whether many of the topics are still fresh in your minds, it is time to look forward to the second half of 2010 and better prepare ourselves for the months ahead.

There are two very important factors to consider going into the second half of 2010:

  • The economic growth forecasts of government economists and others have been far too optimistic in my opinion
  • Unemployment levels and lack of significant job growth will continue to plague the “recovery”
  • There is an old saying that “if you lose your job it’s a recession; if I lose my job it’s a depression.” Unfortunately, far too many US households have become extremely dependent on a two wage-earner existence. The first signs of trouble in the real estate mortgage market were accentuated by increasing unemployment numbers as many two wage-earner families quickly became one wage earner or “no wage earner” families. If economic growth continues to be sluggish, unemployment will remain very high. Consequently, the two factors listed above become inextricably linked and remain the large albatross overhanging our financial well being.

    How do we prepare for a continuing recession?

    While many remain fortunate in holding their jobs, still others will succumb to the unemployment hammer. The most important thing to do in anticipation of even tougher times ahead is to bolster our personal savings to any extent that we can. Some ways to accomplish this are:

  • To take on additional employment hours if available and “salt away” everything we can
  • To cut personal expenditures for non necessities and bank any excess funds at month’s end
  • To pay down credit card debt to any extent possible to relieve the outflow of cash associated with high interest rate credit
  • To review necessary expenditures such as auto and home insurance costs, cable TV bills, mobile phone service: these companies are hurting just like the consumer, but they won’t come to you and offer lower costs, you must actively seek better pricing
  • To take advantage of every discount, coupon, “special” available for goods and services that you do need (e.g., AAA discounts on hotels, car rentals, etc.)
  • To review any opportunity to refinance your home mortgage, particularly if you have at least 25% or greater equity in your home’s current market value and you can qualify for substantially lower interest rates
  • The last bullet point above could be a powerful tool to build savings reserves if you have substantial equity in your home and your current mortgage interest rate is a full point or more above current preferred rates. For example, if you are paying 6.0% on a $200,000 mortgage balance and you can refinance to a 5% or 4.75% mortgage, you can “bank” an extra $150 - $175 per month into savings.

    There is always great temptation to use savings generated by any of the means above to satisfy other wants and needs. I must emphatically state that in my opinion personal savings balances will determine the financial fate of the average American household over the next 5 years. Times will get more difficult in my opinion before they get better. Furthermore, I believe interest rates will begin to rise later this year. It may be a moderate rise, but nonetheless it will indicate the next trend for rates and therefore it is important to look at

    refinancing sooner rather than later if you are in a position where such action may be to your advantage.

    It is also my opinion that income tax rates will also begin to rise, particularly on the upper and middle income bracket taxpayers.

    As I have written before, it is important to have a professional opinion as you chart your own financial plan, and I would seek the advice of the BCU Investment Advisors or of your own personal financial advisor as you make your plans to not only survive but to thrive in the coming months.

    ©Patrick J. Catania 2010
    The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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