United Bank & Trust Blog

Gary Haapala

Times have changed, and our ability to adapt to our circumstances has been proven — again. As consumers, we have reduced our thirst for consumption, and this is evident in two key areas. First, personal debt levels have been reduced – not all by choice – but we have taken our medicine and have begun the financial rebuilding process. Secondly, savings rates have increased dramatically. According the Bureau of Economic Analysis (www.bea.gov) the savings rate peaked at 6 percent in May, and remained above 3 percent for the past six months, compared to near zero to negative savings rates of the past few years.

The past two years has clarified our understanding of risk. We now have a clearer view of the possibility of job loss, market volatility (the stock markets go up AND down), and the value of our home can decrease so we shouldn’t use it as a checkbook. This created an environment of fear and general lack of confidence in the financial system. So what should we do now with our savings?

Here is a four-step process to help answer the question. You should implement this strategy in order.

Step 1: Build a necessity fund. You should consider this to be your emergency fund. Stuff happens. You need to have resources ready and available to handle the unexpected. Open an FDIC insured savings account and build it up to a balance that equals six to nine months to cover absolute necessities (rent, utilities, food, transportation, etc.). The key here is safety, so you will not get the greatest return on your money, but you know it will be there when you need it. Only use it in an emergency, and then replenish it.

Step 2: Build a sleep-at-night fund. The next step is to build an account to cover your living expenses. I suggest you consider certificates of deposits or a money market account. This account should have a balance that equals another six to nine months to cover your lifestyle expenses, in addition to your necessity fund. The key here is to remain conservative so you can sleep at night knowing that your necessities and living expenses are covered for the next 12 to 18 months. Use this fund to fill gaps in temporary changes in lifestyle, and then replenish it.

Step 3: Build a feel-good fund. Most people need an accountability partner to build a long-term investment portfolio, 401(k), IRA, or trust account. This partner can be a spouse, parent, friend, or financial advisor. The key is to work with someone who can remove the emotion out of the decision-making process, and can ensure that a disciplined process is followed. This person should be able to objectively help you to identify your goals, understand your tolerance for risk, agree on an asset allocation approach, and ensure a diversified selection of investments for your portfolio. Use this fund to execute against your long-term goal.  For example, your goal might be to retire by age 60, and this fund would be your income source for retirement.

Step 4: Build an extracurricular fund. All too often this is where we begin, the play money fund. I don’t think I need to explain this fund, we all already understand it. Remember money is a tool. We need to use the appropriate tool to accomplish our goal.

Times will change — again —and we will be tempted to forget the past and become thirsty consumers. It can be much different if you take care of steps one through three first.

Bob Chapman

Next year, I’m excited to take the helm of the Michigan Bankers Association Board of Directors. A large part of what the association does is advocate on the issues facing community banks, and new regulations will be a main point of concern. About a month ago, President Obama stated his view of financial regulatory reform. The broad picture was to try to get more oversight on shadow banking, mortgage brokers, and others that really started the economic problems we’ve been facing. Community banks weren’t involved in that; we weren’t making sub-prime loans, yet we may face more regulation, as well.

I was recently interviewed by the Ann Arbor Business Review, where I expressed my views on regulatory reform, and what the Michigan Bankers Association will be doing to address it. You can read that entire article at http://tinyurl.com/kmaswr.

We all know that some institutions got out of hand, and that more oversight is needed to ensure it doesn’t happen again. But this time, let’s do it the right way and better regulate the ones that need it, not the ones that don’t.