The Basics of a Balanced Personal Financial Strategy

The results of the second GBR poll on debt vs. savings are in!

• All participants said they have changed their personal financial approach due to the current economic instability
• 60% say they are working harder to pay down all their debt.

The GBR Blog asked Davide Accomazzo, Adjunct Professor of Finance at the Graziadio School of Business and Management, to comment on the results and offer some practical advice on riding out the economic turbulence. He wrote:

The poll, albeit not statistically significant, does seem to empirically and anecdotally confirm my macroeconomic view: the great deleveraging is alive and well. The aftermath of the bubble years seems to have not only forced financial institutions into deleveraging, but the unstoppable American consumer as well.

The shift from a leveraged consumerist approach to a saving-prone one is of vast significance because it marks a psychological and material change in the way Americans view their financial positions and their lives overall.

The economic repercussions should last a very long time and deeply affect fiscal, industrial and trade expectations in the short and in the long run. Influential Brisitsh economist John Maynard Keynes once referred to the “paradox of thrift” as that situation during a recession when economic agents will become individually more financially cautious—a personal positive—but in so doing, create a fall in the aggregate demand—a collective negative. Based on this simple observation, we should expect large fiscal deficits and a continued economic malaise; during a deleveraging process, the cost of money will become a secondary concern and the higher priority will continue to be to reduce risk (at the corporate and at the individual level).

The basics of a balanced personal financial strategy are relatively simple:

• Spend in accordance to a wise budget
• Invest for the long term with discipline and common sense
• Insure yourself properly
• Use credit cards as a money management tool NOT as a leverage tool

Related Articles in the GBR

Debt Tied to Lower Firm Performance by Michael D. Kinsman, PhD, CPA, and Joseph A. Newman, PhD

The Book Corner Reviews: Save Now or Die Trying by John Briginshaw, PhD

An Alternative Way to Manage Equity Portfolios Davide Accomazzo, MBA and Rosario Rivadeneyra