Personal Finance Advice

More trouble may be brewing for credit markets in the upcoming year.  The growing fear of inflation has caused many large institutional investors to pump money into the commodities market, forcing prices upwards as the market becomes over saturated. 

The assault on the dollar in exchange markets has not helped either.  This is a huge problem with so much of our nation’s debt being held overseas.  Foreigners are becoming more  and more reluctant to hold U.S. Treasury Securities. 

Right now, the annualized rate of inflation is higher than the yields offered on Treasury Bills.  A number of central banks have expressed dismay at this and many foreign entities are considering drawing down their stocks of dollars and dollar denominated assets.

I wrote about this type of scenario back in November when China was threatening a massive sell off of U.S. Treasury Notes as retaliation for proposed trade sanctions.  If the fixed income market becomes flooded with Treasury Securities, prices will tumble and send long term interest rates soaring.

Once it starts, it could become a domino effect, forcing other entities to get out of dollars before it’s too late.  The effect on future economic growth could be devastating.  If you think it’s hard to find credit now, you haven’t seen anything yet.

With the increased volatility in the stock and bond markets, most investors need to start thinking long term.   Although a smart day trader can do quite successful in this type of economic climate, the risks are considerable.

However, for most people this is a time of high anxiety, though it need not be so.  For investors with a time horizon of five years or longer, this is a golden opportunity to buy.  While the stock market might not have hit rock bottom quite yet, prices have fallen considerably from their highs of last summer.

There are many factors to consider when choosing which type of investment vehicles to put your money in.  The importance of proper asset allocation can not be overstated.

The simplest way for most people to diversify their stock portfolios is to invest in mutual funds.  While no amount of diversification can do away with risk entirely, it will help minimize potential losses.

The amount of risk individuals are willing to take on is subjective and will vary from person to person.  The bond market for instance might be a relatively safe investment but if the economy is entering an era of rising inflation, those gains can be quickly eroded.  If you also had some money invested in an inflation hedge like commodities, which is considered a relatively risky investment, your overall risk would be reduced.

A lot depends on what your financial goals are.  Whether you are saving for a new home or planning for retirement, it is important to map out what you want to achieve as well as the time frame you want to achieve it in. 

You can always tell how a state’s doing financially by looking at the tuition rates at the state run colleges and universities.  With local and state governments having difficulties financing their debt because of recent disruptions in the municipal bond market, a number of states have already started raising tuition fees.

Many families will also find it difficult to finance their child’s higher education with a home equity loan or mortgage.  Much of the wealth built up by the middle class has been lost, as home prices have plummeted in the worst housing slump in generations.

Some institutions have increased the number of grants they offer to help incoming students compensate.  It becomes essential for your child to apply for any and all grants and scholarships for which they might qualify.

Lawmakers are also trying to increase the limit on federal student loans which is capped at $3,500 for first year students.  With tuition costs rapidly outpacing inflation, this limit has been outdated for years.

This can be a drawback for families with low incomes that receive a high amount of financial aid, colleges and universities tend to offer aid packages up to the federal loan limit.  So, if the limit rises, the amount of aid you receive will more than likely fall.

On top of all that many lending institutions have stopped offering student loans all together.  While the Fed has been slashing interest rates since last fall it has had little effect on the rates of student loans which remain relatively high.  Coupled with much tighter lending standards, finding any kind of financing may become a daunting task.