July 2013 Articles

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A New Normal For Personal Finance

A New Normal For Personal Finance Source: LSU AgCenter
Even if we are among the fortunate few who have not been adversely impacted by the economy, we all know, or have heard or read about, someone who has been impacted by unemployment, home foreclosure or bankruptcy, and we wonder, “When are things getting back to normal?” According to Barbara O'Neill, Ph. D., a certified financial planner and professor of financial resource management in the Department of Agricultural, Food, and Resource Economics at Rutgers University, there is a new normal, and we all need to be preparing for it. Currently in the United States, we are experiencing a recession, collapsed banks, mergers, takeovers, mortgage defaults, decline in home values, increased costs for basics, unstable markets, high unemployment, negative wealth effect and more financial distress nationwide than most of us have ever experienced before. Americans are starting to save more, which is positive for individuals. However, we must remember that what is good for the individual can be bad for the economy, and vice versa. Increased personal savings means less is being spent by consumers, and less spending means it takes longer for the economy to recover from the recession. Also, as we take better care of ourselves, we will live longer and need more savings to pay for more years of living in retirement. The trends we experienced leading up to the recession were unsustainable. There was the housing bubble, the credit bubble, mortgages being bundled into subprime packages to be sold, risky derivatives and more. Our nation is seeing, up close and personally, the four common things that happen after a financial crisis like the one we’ve been experiencing. There are prolonged asset market collapses in housing and the stock market, a decline in output, high unemployment and an explosion in government debt. Baby Boomers have been hit especially hard by two financial crises during their lifetime. There was the tech bubble of the early 1990s and the housing bubble for most of the 2000s. The way we cope, or how we have reacted to all this financial bad news, corresponds closely to the Kübler-Ross model of the five stages of grief. Initially, there is shock and denial, anger, depression and detachment, dialogue and bargaining, and then hopefully, in time, there is an acceptance of the “new normal.” So, what are some of the components of the new normal for personal finance? We can expect slow economic growth, low stock returns, high unemployment, precarious job security, increased savings and debt repayment, tightened credit standards for loans, decreased household spending, increased globalization and the possibility of inflation as the crisis abates. Currently, 20-23 percent of U.S. workers must freelance (be self-employed) due to job loss. This is expected to rise to 40 percent in the next decade. This will mean less work, less income, no steady income and no benefits provided through an employer. This is a deeper and longer recession than we experienced in the 1980s. Frugality is definitely a big part of the new normal. Easy credit and inflated house values are things of the past. Taxes may go up. One in four (23%) in the United States is now underwater on their mortgages, and this will continue to effect and lower housing values. Employee benefits are declining or going away. Men have been hit harder in this recession than women (due to the jobs they held). There will continue to be lots of uncertainty. Investment returns will continue to be low. For retirement planning, working longer is the most effective catch-up strategy. For most of us, the new normal will require that we replace mall shopping with something less costly, like exercise. Budgeting, which is and always has been important, now becomes an even bigger priority for Americans at all income levels. For individuals and families, the new normal will require that financial literacy, competence and planning be priorities in each of our lives for the foreseeable future.