The term “new normal” has increasingly been used to describe what is predicted to be an extended period of slow U.S. economic growth, low single-digit annual stock investment returns, stubbornly high unemployment levels, increased frequency of consumer savings and debt repayment, and ultimately, when the financial crisis abates, higher inflation. Since the global financial crisis erupted in the fall of 2008, consumers have been adapting to a “new normal” in their financial lives. At both the macro (i.e., national) and micro (i.e., individual) level, the credit, over-consumption, and housing bubbles that preceded the financial crisis were simply unsustainable.
Baby boomers, born from 1946 to 1964, and older members of Generation X behind them are especially adjusting to changes in the economy. These are Americans who experienced, not only one major asset bubble, but two, during long stretches of their working lives. First there was the extraordinary run of high double-digit annual returns in the U.S. stock market during the late 1990s. This was followed by the housing bubble during much of the 2000s. Limited recovery time for battered retirement savings accounts is a major “new normal” issue.
In an Employee Benefit Research Institute study of 401(k) account balances following the financial crisis, workers with low account balances relative to contributions experienced minimal investment losses that were more than made up by new deposits. Many young workers fall into this category. On the other hand, those with more than $200,000 in account balances, often older workers with long periods of service, had an average loss of more than 25%.
In times of uncertainty, “knowledge is power.” Below is a description of two key areas of personal finance: planning and goal-setting and budgeting. Both are important pre-requisites for investing.
Planning and Goal-Setting
Past research has shown positive results from financial planning and goal-setting including higher savings levels, higher wealth accumulation, and greater feelings of control and happiness compared to those who do not make specific plans. However, other studies have found that relatively few people develop specific written financial goals with a time deadline and a dollar cost as experts recommend. Setting goals and developing specific plans is a way to maintain some semblance of control over your finances during difficult times.
A simple “paper and pencil” Financial Goal-Setting Worksheet is available for downloading at http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf. Online financial calculators at http://www.dinkytown.net/ can also be used to calculate savings required to fund financial goals and to determine whether or not future plans are realistic. A study of Columbus Saves participants, however, found a possible downside to goal-setting. People who were asked to provide general comments about their savings goals saved more money than those who were asked for a detailed plan. Two possible explanations are that those who set specific goals stop saving once a goal is reached, thereby limiting future success, and/or they get discouraged when they fail to reach a goal and stop saving completely. Two better approaches may be to set less rigid goals based on your current financial status (e.g., “saving more” [than before]) and to steadily work up toward loftier goal targets.
Budgeting
Income volatility is increasingly part of the “new normal.” Even public school and government workers with the most secure paychecks have had their incomes reduced by mandatory furloughs and/or contact rollbacks. In previous studies, written household budgets were prepared infrequently. Perhaps “new normal” uncertainty will increase the use of budgets (spending plans). To download a worksheet that can be completed with a pencil and hand-held calculator, visit http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf.
To download a spreadsheet that uses pre-programmed Excel® software to make income and expense calculations with a computer, visit http://njaes.rutgers.edu/money/templates/Spending-Plan-Template.xls. For tech-savvy consumers, online budgeting tools that integrate budget calculations with other financial data (e.g., loans and investments) and automatically update them may be preferable. Commercial online budgeting Web sites with encrypted user names and passwords are also available.
Want to develop an investment plan and/or recover assets lost during the financial crisis? Start with the basics! Set future financial goals and develop a budget (spending plan) that includes a regular amount of savings earmarked to fund future financial goals. Take charge of your finances with planning and action. A “new normal” in financial management appears to have taken hold in the U.S., at least for awhile. As with many things in life, with new challenges also come opportunities.
