Volume 14, Issue 6
Economic Forecasts: Understand the Basics
When weather forecasts turn out wrong, we usually can make alternate plans that have little consequence in the larger scheme of life’s events. In contrast, when economic forecasts disappoint, the consequences may be more significant. Nevertheless, making decisions about your financial future involves some guesswork, and an educated guess—even with elements of uncertainty—may be a better alternative than traveling into the future with no forecast at all.
Unfortunately, economic forecasting,like forecasting the weather, is far from an exact science. Even professional economists may strongly disagree on the direction of the economy at any given point in time, based on their differing interpretations of conflicting economic indicators. Although many factors are important in assessing the economy, this discussion will focus on two key points that can help you get a better feeling for where our economy currently stands. . .and in what direction it may be headed in the near future.
How Much Longer. . .?
Economic forecasters are always searching for storm clouds that might signal an economic downturn. Since consumer spending has historically accounted for about two-thirds of the economy, many observers have looked to “pocketbook” issues in search of primary clues as to which way the economy may be heading.
While consumers don’t usually cut back first and cause a recession, buying more on credit translates into greater monthly payments, and consumers, at some point, can do only what their incomes will allow.With personal debt historically on the increase, keeping an eye on consumer debt levels is particularly important because of the sheer weight of total consumer spending in our economy. However, it may be wise to eventually concentrate your attention on current federal decisions that set the foundation for our overall economic climate.
The Role of the Federal Reserve Bank (the Fed)
Even the casual observer of business news knows that “Fed watching” is a serious activity in the financial and business sectors. You may be asking yourself, “What makes the Fed so important?”
While consumers can affect the economy by acting according to their own perceptions and pocketbook pressures, federal policy decisions, such as fiscal and monetary measures, can also move the economy. Fiscal policy, enacted by Congress in the form of tax and/or spending legislation, is the by-product of the political process and the prevailing political climate. In contrast, monetary policy is the purview of the Fed, whose role is to evaluate all of the forces acting on the economy (individual, market, and governmental) and to take the action it believes will keep the economy on an even keel.
The Fed can manipulate the money supply in hopes of obtaining a desired effect over time. However, the Fed’s most effective short-range policy decisions with which to manipulate the economy involve short-term interest rates. Consequently, the Fed can realistically have only one target—inflation. If the Fed perceives that prevailing forces will increase inflation, it will attempt to slow the economy by raising short-term interest rates (the assumption being that increases in the cost of borrowing money are likely to dampen both personal and business spending behavior). Conversely, if the Fed perceives the economy has slowed too much, it will attempt to stimulate growth by lowering short-term interest rates (i.e., lowering the cost of borrowing in an attempt to stimulate spending).
In carrying out this balancing act, a very cautious Fed walks a fine line. If it doesn't’t tighten the reins soon enough (by raising interest rates), it runs the risk of inflation getting out of control. If it fails to loosen soon enough (by lowering interest rates), it can plunge the economy into recession. Indeed, one might argue that the primary goal of the Fed is to keep inflation low enough so that it is not a factor in business decisions.
Up, Down, or Sideways?
By looking at your own spending outlook and debt burden (and that of your friends, relatives, and business associates), you may gain some insight into the short-term future of the economy. While by no means the complete story, it does represent a large chapter since it is the one over which individuals can exercise the greatest control. When combined with a little judicious Fed watching (e.g., several interest rate moves in the same direction may be an indication that the Fed is on a mission), you may have a fairly good basis for making sound decisions with regard to your own financial future.
Care Issues for Older Seniors
These days, it is not unusual for many people to live 20 or more years beyond normal retirement age. When seniors reach their eighties and nineties, plans that were satisfactory at age 65 may require a second look. Some areas of special concern to older seniors and individuals with aging parents or loved ones are asset management, health care, and living arrangements.
Many older seniors may find them-selves unable to continue managing their assets. A variety of arrangements are possible to transfer that responsibility to others, among them:
- Revocable and Irrevocable Trusts. Seniors who wish to retain control over their property,while delegating the daily management to others, may want to consider a revocable trust. This arrangement would allow the senior to monitor the management of his or her assets, yet offers the flexibility to change the trust as needs and circumstances warrant. As added protection, a revocable trust may remain unfunded, as long as the senior is legally competent. Alternatively, an individual who is willing to relinquish ownership of assets altogether could establish an irrevocable trust.
- Durable Power of Attorney. This mechanism allows seniors to designate a trusted relative or friend to make legal and financial decisions for them in the event of disability or cognitive impairment. The powers granted may be limited or broad in scope, and they may vary from state to state. Some financial institutions are reluctant to recognize durable powers of attorney, so it is worthwhile to thoroughly explore this option beforehand.
- Informal Arrangements. Some seniors transfer property informally to their heirs—in many cases free of gift taxes—in ex-change for being taken care of for the rest of their lives. This arrangement, however, should be approached with caution. Even well-meaning adult children may unintentionally deplete assets through poor management, divorce, or creditor claims. Once the assets are gone, the senior could become dependent on the goodwill and financial assistance of relatives.
With health care costs spiraling upward and people living longer than ever before, seniors of advanced age should anticipate facing high medical costs. The federal government provides some health care benefits through the Medicare and Medicaid programs, but seniors need to understand the coverage those programs may provide and what costs they can expect to face.
Medicare Part A covers inpatient services at hospitals and other health care facilities. It is provided automatically, at no cost, for seniors age 65 and older who are eligible for Social Security, and at a substantial cost for those who enroll independently. Medicare Part B provides additional health care coverage that is optional and must be paid for separately.
Eligibility for Medicaid, which covers long-term nursing home care, depends on financial need. Seniors may require professional assistance in managing their income and resources to meet Medicaid’s strict eligibility requirements.
Older seniors, who are able to care for themselves and have the means to do so, may wish to remain in their own homes. Public services may be available to help prolong the period of self-care.
However, elders who are unable to live independently have several alternatives to consider. Assisted living/residential care facilities provide a protected environment with a semblance of independent living. Generally, some daily meals are provided in a communal dining room and minimal assistance, such as with washing, dressing, or medications, is available. Continuing care communities offer a combination of independent living and health care support. If family members work, senior daycare centers—either publicly or privately funded—can provide opportunities for socialization and activities to relieve boredom. In some cases, bringing in outside help may be the solution.
Periodically Review Plans
It is wise for aging seniors and/or family caregivers to periodically review existing financial, health care, and living arrangements. In the transition to the later stages of life, fresh needs and concerns may call for revisiting plans made at an earlier age.
Alternatives to Credit Card Debt
When you need quick cash, buying with “plastic” may be one of the most expensive ways to borrow. Credit card interest rates can range as high as 20% or more, while the tax write-off for consumer interest has been eliminated. Yet, many Americans enjoy the convenience of “instant” credit and are in no hurry to pay off their debts.
Many individuals have become accustomed to carrying high balances on their bank cards. At an annual interest rate of 18.5%, a balance of $1,000 costs $185 per year, yet none of that is tax deductible. One of the smartest ways to trim your financing costs is to find alternatives to credit card debt. Here are some possibilities to consider:
- Pay cash for purchases. Resolve not to charge purchases, but pay cash instead. Impulse buying can wreak havoc with your budget and jeopardize your financial future. If you wait several days before making a large purchase, you may find you don’t really need the item(s) after all.
- Transfer debts to lower-rate cards or consolidate them. Deal with high interest credit cards by transferring debt to cards with lower rates. If you must carry a balance, it is to your advantage to pay the least interest possible. Homeowners have the added advantage of being able to apply for a home equity loan to consolidate debts. However, remember that you are borrowing against the equity in your home, so it is generally best to use an equity line of credit for long-term assets rather than consumables, such as vacations and everyday items.
- Use low interest savings to pay off high interest debt. Or,use low rate of return savings to eliminate higher interest debt. Suppose you have a $1,000 certificate of deposit (CD) that reaches maturity at 4%. Instead of rolling it over into another CD at 4%, you could use the money to pay off $1,000 of credit card debt carrying 18.5% interest. You will forgo $40 of interest income but save $185 of credit card interest, for a net savings of $145.
- Comparison shop for credit. Another way to trim credit card costs is to shop for low rate and/or no-fee credit cards. Consumer publications and websites publish lists of economical cards. These lists are often available free, or for a small fee, and are updated periodically.
Credit cards are a fact of life in today’s modern economy. However, the easy availability of credit causes some consumers to forget that credit costs money (interest). Managing debt demands discipline, yet the rewards can be great. By keeping your borrowing costs low in the present, you’ll ultimately have more money for building your future.
It’s Time to Conduct an Inventory
Try closing your eyes and listing your living room furnishings or the contents of your jewelry box. If you have trouble coming up with a complete tally, imagine how hard it would be after the stress of a fire or burglary
Making a written inventory of your household valuables can be one of the best money-saving steps you can take. Property insurers are less likely to question claims based on such inventories, particularly if you submit photographs, videotape, receipts, or an appraiser’s statement for valuable items. Your insurance company may even be able to give you a useful inventory form to fill out. Make sure to keep a copy of your inventory of household valuables with your insurance agent or in your safety-deposit box.
For the Record
Write down the date you purchased each item of value in your home, including its price. If an appraiser has estimated the value of any of your possessions, record the estimate and the date of the appraisal, making sure the appraisal is precise and explicit.
Describe each object in as much detail as possible. Be sure to include its age, brand name, size, model number, and other relevant facts. For example, for sterling silver table-ware, note the manufacturer, pattern,and number of place settings. If your possessions are extensive and of particularly high quality, you may also consider videotaping and recording your verbal description of them.In some categories of property, such as clothing, you may wish to group together a number of articles and attach a single estimate of value. Unless you have closets filled with designer originals, there may be no reason to complicate matters by describing everything in your wardrobe.
Remember, of all the ways to record your property, the worst one is memory. Because, if you don’t remember you own it, neither will your insurance company.