In the wake of Standard & Poor’s recent downgrade of U.S. Treasury debt and with unemployment rates remaining high, the nation’s troubled economy is a constant topic of discussion. We asked Nicole M. Boyson, the William Conley Faculty Fellow and Professor of Finance in the College of Business Administration for some tips to stabilize individuals’ personal finances as they ride out the recession.
Given the economy’s current state, what are the safest investments?
The market reaction to the downgrade has been for investors to buy Treasury bonds, not sell them, implying that most investors still believe in the long-term security of Treasury bonds. I would argue that both Treasury bonds and cash are safe investments right now‚ if an investor plans to hold those bonds to maturity. The downside of this strategy, of course, is that rates on Treasury bonds are so low that inflation can eat away at any returns the investor earns.
In the current economy, stocks have been much more volatile of late, which makes them feel much riskier.
What steps can people take to help ensure financial stability in the event of a double-dip recession?
If you’re already have a financial plan in place, you should stick with it and avoid worrying too much about the short-term impact of another possible economic downturn. Specifically, if you are invested in the stock market, and your allocation to stocks is appropriate for your level of risk tolerance, now is not the time to sell. If you’re a 25-year-old investor with most of your assets in the stock market, for example, wait this out. You have plenty of time ahead of you to recover this downturn.
If you’re older and closer to retirement and have more allocated to the stock market, this is a harder question. It is possible the economy won’t recover in time for you to recoup your losses. While I would not recommend selling all stocks at this point, you might need to adjust your lifestyle and try to save more to help make up for these losses.
What should students and recent graduates do to prepare themselves for long-term financial health?
Read, read and read some more. Educate yourself on the basics of personal finance, including budgeting, saving and investing. Take classes in investments and personal finance. Don’t run up credit card debt, and if you do, pay it off as soon as possible.
Regardless of your credit card balances, if you are a graduate with a job, start investing in your 401(k) plan. Try to save at least enough to get the company match, but if you can’t afford this amount, at least save 1 or 2 percent to give you a head start. When you get raises, put half of your raise in your 401(k) plan. But most importantly, live within your means and avoid taking on excess debt.