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Personal Finance: 'Tis the Season to be Frugal?
New York: December 11, 2003
By John R. Stephenson
During the holiday season, few pleasures are as satisfying
as whipping out your credit card and picking up that "nice
to have" item. Hey, why not? After all, it has been a long
hard year and you deserve to treat yourself. Right? Well,
certainly we have something to feel good about, the stock
market is appearing more buoyant lately, unemployment is low
and interest rates are positively in the bargain basement.
Credit card debt is dropping (being replaced with mortgage
debt) and the savings rate is trending up to about 4 percent
of disposable income from around .2 percent a few years earlier.
But with total household debt soaring to new record highs,
this might be the time to raise a glass, but also to take
the opportunity to pay down some of your debt while you still
can.
The worry? If the economy sputters, then your job or business
might not be around to make the payments on your credit cards
or mortgage. If the market rallies and inflation become a
persistent worry, then the Fed will raise interest rates to
combat inflation and with a meager 4% savings rate, most people
won't have an ample financial cushion should the economy break
one way or another. In Canada, the savings rate is even more
abysmal than it is in the US with Canadians owing a staggering
106 percent of what they earn in income. In a society based
on consumption (two-thirds of the US GDP is consumer spending),
governments have an incentive to paint as rosy an economic
picture as possible to keep you spending.
Although the jury is still out on the direction of markets
and the economy over the short term, there is a worrying longer-term
trend for the west. We're all old and getting older (see figures
1 and 2). Sure, there are a few young people, but not as many
as there used to be. Have you noticed that most of the music
stations are playing music you enjoyed in your twenties? With
people living longer than before, the dependency burden on
society is projected to positively explode. With a greater
percentage of the population reaching retirement age and beyond
than at any other time in our history, government has little
choice but to raise taxes or cut back on service levels. This
means that your own retirement plans will be pushed back or
put off in some way unless you start planning today to take
the appropriate steps. Your personal strategy should be to
get your economic house in order by slashing your debt and
head to higher ground as fast as you can.
The future is going to belong to those who take control over
their destinies and take the necessary steps to assure their
financial futures. With so much uncertainty out there, perhaps
your New Year's resolution should be a promise to yourself
not to fall victim to other people's problems anymore and
to take the action necessary to craft a future for yourself
that is as independent of government action and as self reliant
as possible.
Figure1:
Source: OECD
Figure 2:
Source: OECD
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