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Fletcher: Not much hope for personal finances

July 3, 2012
Stephen Fletcher , The Alpena News

We know from published reports both personal and corporate saving rates are increasing. Prior to the recession the personal savings rate was so low as to be negligible. Historic rates previously had been around 4 percent but after 2000, American families were spending more than they were earning.

Personal debt in the country was expanding rapidly as a percentage of earned income. The two biggest expenditures for an average family are their home and automobiles.

The recent Community Reconstruction Act required lenders to issue mortgage money to folks who couldn't repay it and cars were outrageously discounted so folks bought them on credit.

As an aside, the Community Reconstruction Act eliminated "red-lining," a practice of prohibiting bank lenders to make loans in certain geographical areas which had a history of not repaying loans. This created situations where low income people with poor credit ratings could not get mortgages. This especially impacted low income areas. In large cities, red-lining was said to be racially discriminatory while in places like Northeast Michigan, it impacted folks who couldn't afford mortgages.

After the recession the demand for car and home loans just dried up. People were anxious about the economy and decided that saving a little money instead of expensive purchases made real sense. As a consequence, the personal nationwide savings rate is up around 4 percent.

Companies are no different. Concerned about tax policies and their potential impact to long-term forecasting, they have been building up cash reserves to hedge against uncertainty.

Last week's favorable ruling by the Supreme Court on Obamacare adds a new 3.8 percent tax on every house sold - part of a new national tax policy. Taxes are rising but incomes aren't, adding to the our economic uncertainty.

The question is: "What do we do now with our savings?"

The answer involves money rates - both lending and borrowing. If we keep the money in checking or savings accounts, we can expect to earn somewhere around 0.2 percent interest. Right now inflation is about 10 times that amount. Personally, I think real inflation is at a higher rate than what the government is reporting. It doesn't matter who is right as in either case, cash reserves don't earn as much as inflation.

Mortgages are at an historic low but still are about 35 to 40 times the amount that you can earn on your cash. Credit card debt? How silly, it's about 200 times the rate earned on checking.

So, if you have more than a cash reserve to cover a few months for emergencies and daily expenditures, then consider paying off credit card debt, car loans, and mortgages - in that order with your excess cash. In the case of the mortgages, the monthly payments will stay the same and the real savings comes from the shortening of the term of the loan.

Beware of pre-payment penalties with installment loans for automobiles and appliances. It may be better to let those ride and make extra payments on the mortgage due to penalty clauses in the documents.

Are you all paid off? Consider a local financial institution's certificates of deposit or commercial paper. Investing locally returns the interest paid by local businesses to the community and not to multi-state corporations.

Unless there is a Republican or a Democrat sweep in November whereby a single party holds both chambers of Congress and the presidency, I don't foresee much change in the uncertainty in this economy.

You can always reborrow money and it's easier to do if you have a record of being early on payments rather than late. Your most certain investment opportunity in a time of economic flux just may be to pay off some borrowing.

Stephen Fletcher was graduated decades ago from Cornell University with an A.B. in Economics and from Michigan State University with an M.B.A. He has lived and worked in the decades from graduation until now in the Alpena area. He thinks economics is fun and interesting.



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