My crystal ball has been opaque since I got it, so here are two murky predictions for 2014 and what you can do about them:
1. Interest rates could go up, stay the same, or go down
The warnings that interest rates could rise have been barked at us for so long that they don’t even register any more. When those calls first started, no one suggested that rates would hold as long as they have. Eugene Fama, one of the three-way winners of the most recent Nobel Memorial Prize in Economic Sciences, has suggested a world-wide recession is a credible risk for 2014. That would essentially kill off any chance of a rate increase and even lead to further stimulus.
Since we don’t know what will happen, it’s best to prepare for the worst and hope for the best. Given the record levels of debt-to-income, we know that while some are handling credit responsibly and the opposite side of the balance sheet may show some commensurate increases in assets, there are others who are one rate increase away from disaster.
Make 2014 the year to pay down high-interest debt aggressively. You’ll be better able to weather a rate increase when and if it happens in 2014, or your seemingly Herculean task will get easier if rates stay low or go lower.
Avoid debt consolidation loans unless you know you’ve changed your ways. Some people fall into the trap of accessing the freed-up credit card and lines of credit balances that were just consolidated. A few years later they might consolidate again and find that they owe more money than ever. If you can’t actually stick to a budget, a consolidation of debt into a loan or your mortgage is just asking for more rope with which to ultimately hang yourself.
2. Stock markets could go up, stay the same, or go down
First you need to decide if you are an investor or a gambler. An investor takes a long-term approach with a portfolio that is prudently diversified. They ignore day-to-day, month-to-month and year-to-year movements. If markets do really poorly, they might add money, not take it out.
Gamblers don’t really have a great grasp on the investment world. They are trying to outsmart the next guy by reading up on weekends, and maybe even evenings. But the “next guy” might be a small army of PhDs who work full time, day and night, and who are more than happy to have you on the opposite side of the trade.
Make 2014 the year you set up a proper financial plan (that includes an Investment Policy Statement). Ask your financial planner (not a financial salesperson) to create one with you. If you own a car, would you take it to a mechanic to get more horsepower even though the body is rusting out, the tires are flat and the windshield is missing? We all seek financial security, but trying to achieve that by attempting to beat the stock market is using the same faulty thought process.
Learn what a financial plan is, then go get one.
3. Housing could finally bust
Then again, it might continue to defy logic a little longer. My girlfriend and I sold our house and became renters in 2013, but it wasn’t because we were trying to time the market. You can’t time any market (stocks, bonds or housing) with reliable success. It was necessary for us to move to accommodate her new job, and given the fundamentals, coupled with us not knowing if we wanted to put down roots in the new neighbourhood we picked, renting was a no-brainer.
If you’re a home owner now and have no reason to move any time soon, tune out the housing market. If you’re thinking of becoming a homeowner, then as long as you have reasonable confidence you’ll be staying put for 10 years and can afford to put money away for the future after your housing-related expenses, then you can start to weigh the pros and cons of home ownership.
If you are going to buy, your decision shouldn’t be rushed or based on the societal expectation that home ownership is a sign of success, regardless of all the other factors.
One thing to keep in mind: A nasty downturn is entirely possible, but while it might take a long time for prices to recover if that happens, they eventually would. That’s why a long-term perspective is important.
At the end of a 25-year mortgage, you should have a large asset and no mortgage debt. If the housing market is hot or cold at that point in time, either way it’s not a bad spot to be in. The potentially wild ride is easier to stomach if you look at your house as a home first and an investment second, and not the other way around.
Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network. You can read his blog at WhereDoesAllMyMoneyGo.com and follow him on Twitter at @preetbanerjee.