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Personal Finance: 'Tis the Season to be Frugal?
New York: December 11, 2003
By John R. Stephenson

During the holiday season, few pleasures are as satisfying as whipping out your credit card and picking up that "nice to have" item. Hey, why not? After all, it has been a long hard year and you deserve to treat yourself. Right? Well, certainly we have something to feel good about, the stock market is appearing more buoyant lately, unemployment is low and interest rates are positively in the bargain basement. Credit card debt is dropping (being replaced with mortgage debt) and the savings rate is trending up to about 4 percent of disposable income from around .2 percent a few years earlier. But with total household debt soaring to new record highs, this might be the time to raise a glass, but also to take the opportunity to pay down some of your debt while you still can.

The worry? If the economy sputters, then your job or business might not be around to make the payments on your credit cards or mortgage. If the market rallies and inflation become a persistent worry, then the Fed will raise interest rates to combat inflation and with a meager 4% savings rate, most people won't have an ample financial cushion should the economy break one way or another. In Canada, the savings rate is even more abysmal than it is in the US with Canadians owing a staggering 106 percent of what they earn in income. In a society based on consumption (two-thirds of the US GDP is consumer spending), governments have an incentive to paint as rosy an economic picture as possible to keep you spending.

Although the jury is still out on the direction of markets and the economy over the short term, there is a worrying longer-term trend for the west. We're all old and getting older (see figures 1 and 2). Sure, there are a few young people, but not as many as there used to be. Have you noticed that most of the music stations are playing music you enjoyed in your twenties? With people living longer than before, the dependency burden on society is projected to positively explode. With a greater percentage of the population reaching retirement age and beyond than at any other time in our history, government has little choice but to raise taxes or cut back on service levels. This means that your own retirement plans will be pushed back or put off in some way unless you start planning today to take the appropriate steps. Your personal strategy should be to get your economic house in order by slashing your debt and head to higher ground as fast as you can.

The future is going to belong to those who take control over their destinies and take the necessary steps to assure their financial futures. With so much uncertainty out there, perhaps your New Year's resolution should be a promise to yourself not to fall victim to other people's problems anymore and to take the action necessary to craft a future for yourself that is as independent of government action and as self reliant as possible.

Figure1:

Source: OECD

Figure 2:

Source: OECD



StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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