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In order to offer new perspective to today’s economy, Titan Magazine asked several Cal State Fullerton specialists for their thoughts on various aspects of personal finance. From recognizing possible tax breaks to saving for a rainy day, their insights and ideas may help you navigate successfully through the recession.
Over the past 35 years, the personal saving (the portion of personal income that is not spent on current consumption but that is instead used to provide funds to capital markets or invested in real assets such as residences) rate has ranged from a high of 11.2 percent in 1982, to a low of close to zero percent during the first quarter of 2008. Note the recent uptick in the personal saving rate:
While the impact on funding investment in capital markets and real estate is important, as is the related issue of your personal indebtedness, let’s put those aside for now. Let’s just focus on personal savings.
People save to prepare for the future – for retirement and for rainy days. Since we expect or hope to receive Social Security upon retirement, and since housing values skyrocketed from 1997–2007 (and the wealth in our homes also contributes to our retirement savings), it is rather easy to guess why the savings rate fell during the 35-year period, and even why it was at a low in early 2008. It also is rather easy to understand why people have started saving again: They are more anxious about their future retirement plans, and their home values (equity) are plummeting. In addition, since we have had many rainy days in the past year or so, those rainy day funds need to be replenished. Let’s consider both the long-term (retirement) and the short-term (rainy day fund).
Many retirement planners would recommend having anywhere from 10 to 25 times your current household income as a nest egg. With the median annual household income at about $50,000, you should have about $1 million by the time you plan to retire, which would then provide you with an annual income of $40,000 to 50,000/year in retirement (4 to 5 percent of the total annually). But you can subtract your Social Security income equivalent and the equity in your home from that amount. If you expect to receive $25,000 per year from Social Security, then you only need half a million, and if you expect your home to be worth $500,000 in retirement, then you don’t have to save anything (which may explain the near zero percent personal saving rate in recent years). Even though I am being generous in both Social Security payments and in real estate equity, perhaps we are better at planning than we thought!
Home equity, Social Security payments and our nest eggs are intrinsically related. The more of any one of them, the more wealth we have in retirement. Since home equity has been ravaged and we are becoming more anxious about Social Security, people are saving more. That makes sense.
But what about my situation, you ask? How can I weather the most severe recession since the Great Depression? If you are the average person, you are acting rationally – you are saving more. While some of us have already had rainy days (with the unemployment rate at about 10 percent), they are about to begin for others. And you are taking action. By not spending your current income, you are more able to pay those inevitable bills and even to weather the possibility that a spouse is layed off.
There is one additional exercise you should complete, namely to track your take-home income and all of your expenses, even to the penny, for three to six months. Your expenses should include all of your monthly debt payments (and other regular monthly payments). You may well be spending money that could be saved for that rainy day.
Once you have your budget information, you can then review your habits. For example, do you really need those two bottles of water every day? At 50 cents for a 12-ounce bottle, that is about $5 per gallon – 100 times what we pay in Fullerton (tap water costs about 5 cents per gallon, and we receive quality reports every year). Add in the daily Starbucks drink; soft drinks; monthly cell phone, PDA, Internet and telephone bills and you get the idea. Without writing down all of these daily/monthly costs (in Excel or on paper), you won’t be able to visualize your habits – and your habits can get you into trouble or provide you with a cushion. If you believe that you or your spouse may be without a job for several months or longer, then begin reviewing your budget now!
To get the economy going again, taxpayers have benefited from one major tax bill at the federal level (the American Recovery and Reinvestment Act of 2009 [ARRA]) and lost most of that benefit through tax increases included in the California budget.
To cover California’s expanding deficit, the first budget for 2009/10 included multiple tax increases. That was not enough, and the 2009/10 budget was short by an estimated $24 billion.
Tax increases effective 2009:
When a steady stream of bad economic news bombards you, it is difficult to stay positive and productive. Whether it is the latest financial challenge or record unemployment rates, the cumulative effect is understandably anxiety-producing. How you respond to these pressures can derail or jumpstart your career.
How you manage a difficult and stressful situation also provides the opportunity to demonstrate your value to your organization, your leadership skills, and your future potential as a professional in your chosen field. Those who cultivate a positive and productive reputation are often the next in line when it comes to growth opportunities and promotions once the economy rebounds. You might ask yourself the following questions: “Have I looked for new ways to contribute to my organization’s success? Have I helped my supervisor achieve his or her goals? Do I help my co-workers who may be faced with increased demands?”
Few situations are as stressful as losing a job in tough economic times. If you find yourself unemployed, it may be helpful to remember that the next job is often better than the last one, whether you measure by work conditions, salary, or opportunities for advancement. Because it is likely to take longer to find a new opportunity in the current job market, there is a real danger of becoming discouraged, leading to an ineffective job search or in some cases, no search at all. It is even more important to sharpen your networking skills, going beyond the job boards and help-wanted advertising if you are going to be successful. Emerging online professional networking tools can provide a competitive advantage for those who carefully invest a few hours each week to broaden their networks. Be sure to get beyond your needs, and focus on what you can do for a potential employer to improve their product, customer service or customer base.
The best predictor of how you will react to both crises and opportunities in the future is how you have reacted to similar situations in the past. That is why smart job interviewers probe your past experiences with behavioral example questions. Your response to this challenging economy will demonstrate your future potential. The next time you are confronted with a difficult situation, respond as you expect a top-performing professional or colleague would respond. Your future just might depend on it.
In economically tough times, ID theft has taken a more virulent avatar. With the rapid increase in automation and computerization of information, protecting your personal identity information is of utmost importance during any economic condition. It becomes an urgent necessity during a recession such as the one we are suffering presently.
In these recessionary times, disgruntled employees are one of the biggest sources of crime involving personal identity theft. These employees may be on the verge of losing a job or have already lost one. They may have walked away from their work with a lot of information that can be used against a company’s customers.
Another motivation for this kind of crime is the desperation that drives criminals to be more aggressive. Some of the crimes that can be used to steal personal ID information include social networking sites for collecting personal information. Sites such as Facebook are employed to collect personal information from innocent readers, with the information then used to commit a crime.
A new trend in 2009 is to set up home-based businesses, advertised using traditional channels such as television. These businesses maybe set up to deliver fake diplomas or fake training certifications.
Some old methods of ID crime have transformed themselves into a more dangerous format. Phishing messages in a specific language (other than English) are used to make the messages more personal. Additionally, the use of free site hosting by Web hosts like Geocities or live.com allows anyone to set up an authentic-looking business that may collect personal information. Free e-mail services can be used to send e-mail from a fake address, allowing a criminal to use a genuine-looking address to collect information.
Information such as Social Security numbers should be shared only when absolutely necessary. Always look for alternative ways to confirm your identity with a verified, genuine party.
In times of economic stress, the well-being of heirs and family becomes a concern. Some estate and tax planning reminders are in order:
Individuals and businesses are facing risks every day in the tough economy. The uncertainty regarding loss can be loss of properties, jobs, investments, health and even lives. Prudent individuals and companies will always value their insurance. However, when the economy gets worse and people have a tight budget, some may try to reduce or cut their insurance in order to save money. Here are a few thoughts on that subject.
First, we need to understand that insurance is vital in terms of surviving a difficult economy. We should not rush to cut down insurance premium payments in order to cut our budget. Although some may try to save money this way, it is not a wise move. In fact, having insurance can help you. Health and life insurance are critical, especially concerning the protection of your family. You may tap your life insurance if it is a permanent product. The cash value accumulated inside your policy can be withdrawn or borrowed.
Second, if you were laid off, you can look not only to unemployment insurance for help, but you can also extend your health insurance through your former employer-based COBRA, or you can buy unemployment health insurance if you are qualified. Even if you can’t afford the life insurance, assuming it is a permanent life policy and the policy lapsed, you could still recover it later under the reinstatement clause in your policy.
Third, due to the financial crisis, the securities market has become volatile. If you are worried about your retirement savings, talk to your licensed financial professional instead of just redeeming your shares for a lower value. Each individual is in different situation depending on their age and their personal specifics. Licensed professionals will provide you with the best advice.
Fourth, there is some insurance that is required by law, such as liability coverage for your auto insurance. If your premium is not affordable you should shop around for a better deal. Canceling this insurance will increase your liability risk.
Fifth, catastrophic risks such hurricane, earthquakes, flood and wildfires occur no matter what happened in the economy. Insurance can protect our home, property and the stability of society.
In summary, insurance is a risk management tool with which you can transfer your risk out to insurance companies in order to protect your financial future. Under the present tough economy we all feel the stress; insurance can serve to minimize this anxiety and financial uncertainty.
The decrease in home equity lending is a natural response to the decline of home equity available as house prices have fallen. Most home equity loans (more than a trillion dollars’ worth) are held on the books of major banks. When house prices started falling and default rates on mortgage loans started increasing several years ago, lenders naturally pulled back from the even-riskier business of lending based on junior liens, which are often a complete loss if the underlying first lien loan defaults and goes to foreclosure. The popular media carried many reports of unused home equity lines of credit being frozen or eliminated altogether, as banks attempted to protect themselves from the risk of further losses. So I would characterize this as part of the natural part of the market correction process. In research I have done on Southern California foreclosures, almost 80 percent of borrowers facing foreclosure had a home equity loan in place.
Regarding Southern California home-building and home-buying activities: Unfortunately, the home-building business is unlikely to recover anytime soon. Home-buying in the resale market has actually picked up a lot in 2009, compared to 2008. This is really Economics 101: At lower prices, you will have a greater quantity of sales. In the long run this is really good for Orange County, because it means housing will be much more affordable, which will make it easier to attract those with important job skills to the area. It also will make so-called workforce housing (housing for clerical and blue-collar workers) much more affordable. There may be short-term pain from all the foreclosures and short sales, but longer-term, good news.
Regarding the administration’s plans for distressed homeowners: I don’t have any specific data for Orange County, but I am generally skeptical that many of these programs will be successful and many, indeed, are off to a very slow start. The focus has been on modifying loan payment burdens for distressed borrowers but negative equity (owing more on the home than it is currently worth) is probably the larger problem. In some of my research, I found that households in Southern California, including Orange County, facing a foreclosure sale owed about 150 percent of the value of the property and that debt included a large number of junior liens (seconds, thirds, etc.) that had been taken out after the property was purchased. So it’s not so much that borrowers were just unlucky and about at the top of the market, rather they over-leveraged themselves over a matter of years and once house prices started declining, they got stuck in that negative equity position where they couldn’t refinance and couldn’t sell without putting in more money (something few want to do if default is non-recourse).
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