Professor Neil T. Skaggs is quoted in two recent articles in the local newspaper, The Pantagraph. Both articles address the current economic climate and implications for personal and household finances. Excerpts of both articles are provided below. Visit our Faculty and Staff profiles for more information on Professor Skaggs and his colleagues.
For Central Illinois, It's Tug-of-war to Find Economy's Silver Lining
By Michelle Koetters / The Pantagraph / Tuesday, December 30, 2008
BLOOMINGTON -- Here's the good news: The economy is not all bad. But, some of what’s going right also is an indicator that conditions have deteriorated nationwide. Though for now, maybe we’ll take whatever we can get that’s helpful to our checkbooks, such as lower gasoline prices. Mortgage rates also are at historic lows, retailers are bombarding shoppers with discounts, and maybe Americans will learn a lesson about spending responsibly.
The price at the pump fell drastically, from about $4.20 a gallon this summer to below $1.60 in the Twin Cities. Among anything considered good in the economy, gas prices are the biggest issue, but that drop has a trade-off, said Neil Skaggs, an ISU economics professor. “Lower fuel prices have been driven down by the fact that the economy is not very strong,” Skaggs said. “On the other hand, it certainly does reduce the cost of living for anybody who has to drive at all.”
The Federal Reserve has pushed interest rates down, which impacts mortgage rates, Skaggs said. At the same time, lenders take a harder look at whether a family can pay a loan now, he said. That practice should have happened all along and is good to a certain extent, Skaggs said. Lenders might be too cautious now, and fewer people also may be really worthy of credit because of the economy, Skaggs said. Another problem that could arise is a credit system gridlock where lenders may be willing to make loans but their financing sources have dried up, he said.
And no matter how low mortgage rates fall, access now depends on consumers with good credit, said Patrick Dienslake, city president for Regions Bank’s Central Illinois market. But historically low rates will help the country come out of the housing slump in the long run, he said. Locally, Regions loan officers have seen more refinancing activity, Dienslake said. Consumers also can take advantage of a plethora of sales these days — if they have money to spend, Koppenhaver said. Everything from automobiles to retail merchandise is cheaper, he said.
Skaggs simply hopes people will learn they can’t spend by taking on debt. “I have just been disgusted with the complete, excessive commercialization of our society,” Skaggs said. “The notion that anybody at anytime has the right to buy, buy, buy has just sort of pervaded our society.”
Twin City shoppers may have learned the lesson of spending responsibly — or could in the coming months. Customers use cash, checks and debit cards more than credit cards now, said Joyce Komnick, retail sales manager of Beer Nuts’ company stores in Bloomington. Though people probably have been forced to use cash as credit tightened, the practice could lead to better saving behavior. Many people keep better tabs on their spending with cash, Komnick said. “It gives them more confidence in their own financial situation,” she said. “Then they’re more apt to spend more money.” Consumers have to spend for the economy to grow, said Keith Brannan, vice president of financial security planning for Bloomington-based Country Financial. But they also need confidence, he said. People are “right-sizing” their spending, Brannan said. As people make changes, their optimism will increase, he said.
Controlling Spending Key to Financial Fitness in 2009
By Michelle Koetters / The Pantagraph / Wednesday, December 31, 2008
NORMAL -- Holiday spending may be over, but the recession isn’t. And that recession is expected to last through fall 2009, said Gary Koppenhaver, chairman of the finance, insurance and law department at Illinois State University in Normal. The situation probably will get a little worse before it gets better, as the unemployment rate is likely to grow through next year, and even as the economy begins to recover, he said.
So what’s a person to do? ISU professors and local financial planners have some suggestions to come to your rescue. Follow their tips “to stay financially fit in 2009,” as Carol Burroughs, a certified financial planner and founder of Forward Financial Planning in Normal, puts it. “We’ve all got to control our spending ... particularly at this point of time in the economy,” Burroughs said. As usual, families can develop or adjust their budgets to see what they’re spending.
Home costs should be between 25 to 30 percent of your net take-home pay, said Diane Ryon, owner of American Capital Equities in Bloomington. In addition, utilities, food, transportation and insurance each should account for 10 to 20 percent while miscellaneous items can make up 20 to 35 percent, Ryon said. Anticipate your expenses, and see if you can afford them, she said. “When you’re trying to stay on top of finances, it’s trying to stay ahead of finances,” Ryon said. “It’s think first and spend second.”
Think carefully about big purchases, and don’t get too much in debt, said Neil Skaggs, ISU economics professor. Never roll over a credit card balance from one month to the next, he said. “That’s the No. 1 thing that drives me crazy. Borrowing long-term on a credit card is stupid,” he said.
Burroughs suggests people observe the 3 R’s — reduce, reuse and recycle — to manage their spending. To reduce what you spend, maybe you won’t go out to eat as much. Instead of buying a book, check one out from the library. Repair small appliances instead of buying a new one. Exchange hand-me-downs for clothing and toys with family or neighbors, she said.
It’s also possible for you to get more take-home pay without working extra hours. Just change your tax withholdings, Burroughs and Ryon said. The average tax refund is $1,500, Ryon said. That’s $1,500 with no interest earned through the year, she said. Families should change their exemptions if they receive refunds of more than $30 for state and $800 for federal taxes, Ryon said. “They could be putting money away and making money instead of paying the government,” she said. The extra money in your paychecks could be put into savings or 401(k) accounts or used to pay debt, Burroughs said.
The general rule of thumb is to have three to six months of essential living expenses in savings. But people should have six to nine months in reserves to feel more comfortable now, Burroughs said.