The stock market is crashing. The economy is tanking. People are losing their jobs. Money is tighter than ever. We have entered the recession, but what do we do now?
“The first thing to start with is a budget,” said David Payne, a professor in Ohio University’s finance department. Payne currently teaches personal financial planning courses, but he lived and breathed business for 30 years, working as a senior officer and senior vice president at PNC Bank in Pittsburgh, Pa.
He suggests a concept called “pay yourself first,” which entails the setting aside of funds for future financial goals before setting aside funds for everyday living expenses.
“What most students do when they come out of college is say, ‘I’m going to get the nice apartment in Dublin and I’m finally going to have a car that I like,’” Payne said. “And then they decide, ‘Whatever I’m going to have left over, I’ll save part of it.’” But Payne suggests that his “pay yourself first” approach, though less popular with the general public, is much more effective. “Not many people do this,” he said. “But it’s a way to actually be successful and reach your financial goals.”
Yes, even you can save up stacks of money. © Shirley Two Feathers / Flickr
An associate professor at OU, Andrew Prevost, agrees that saving is crucial to financial success. And the earlier you start, the better. He currently teaches investments to graduate students and market institutions to undergraduates, but his extensive knowledge of finance once brought him overseas to New Zealand, where he worked as a senior lecturer.
“When you leave school and you get your first job, that’s probably the easiest it is to actually save up a lot of money, because you don’t have any dependents or major responsibilities,” Prevost said. “Take advantage of not having a lot of financial responsibility to actually build something up in saving.”
According to Payne, savings should also be directed to a 401 K retirement plan, even when retirement may be 40 years down the road.
“Don’t tell yourself, ‘Oh gee, I hardly have enough money. I’ll start that next year, the year after that.’ That is not the way to do it,” Payne said. Although 401 K funds are not immediately available, the money grows exponentially and can be extremely beneficial in the long run. “It really adds up,” Payne said. “That’s just the power of compound interest.”
Early saving and 401 K investing are certainly important, but what about the stock market? Is the potential payback worth the risk? According to Prevost, it is.
“History shows that you can only really have good investment returns if you expose your money to the markets,” Prevost said. “If you’re 22 years old, you have 40 years out to retirement, so in that case it’s okay to start exposing your money to markets because you have such a long time to ride on fluctuations [due to the recession].”
Because of the recession, however, many people have turned to credit cards — instant money. Use them now; pay them back later. Although plastic serves a purpose in building credit, it can be an addicting little rectangle of debt.
Use these colorful cards wisely. © pfreviews / Flickr
“People use credit cards like cash,” Prevost said. “You should only buy things that you can actually afford, with money you actually have. Then you are never affected by interest rates; it’s irrelevant to you.”
Payne agrees that credit cards can be dangerous, especially if they end up in the wrong hands, such as those of an out-of-work teenager with a shopping addiction.
“People shouldn’t have credit cards who don’t have incomes,” Payne said. “All the credit card is doing is postponing the payment … if you don’t have an income, then it’s not going to be any easier to pay the cash later as it is now.”
In support of this idea, the U.S. government just recently passed the Credit Card Holders’ Bill of Rights Act of 2009, stating that any individual under the age of 18 may not be issued a credit card, under any circumstances. A similar bill in the Senate suggests the idea that individuals under 21 may not receive credit cards, unless they complete a financial literacy course and have a co-signer. The latter bill is still in debate.
Payne definitely realizes that credit cards can cause problems, but he said that he is not anti-credit card, by any means.
“If you use credit cards as a convenience, in other words, you pay them off every month, that’s fine,” Payne said. “But to use them as a way to borrow is not-so-fine.”
Money management is key, especially during an economic downturn, but will we ever see the light at the end of the recessionary tunnel?
Prevost assumes that it will take about 9-12 months to see economic improvement, while Payne remains a little more optimistic, estimating noticeable improvement in a shorter period of time than most people think.
“My crystal ball is no better than anybody else’s,” Payne said. “But one thing that we know is happening is that the American consumer (who represents about 70% of the American economy) is busy reducing debt right now in what is called ‘deleveraging.’ As both consumers and businesses get more comfortable with lower debt levels, then I think we will have some base for incremental spending and that will help lead us out of the recessionary times.
“I definitely feel that later this year we will see the economy begin to improve.”
(Itty) Bitty Budget 