A period of economic instability can be the right time to plan for your financial future.
Professor Maria F. Davis, coordinator of the banking and financial services program, said it may be healthy for the younger generation to worry, so responsibility becomes more prominent in their thinking. "I am so horrified that the economy has come to the state that it's in," she said. "I think worry is a reasonable state for all of us to have."
Davis said she was not happy with the government's bailouts for private companies, or the huge printing of money accompanying them, but viewed this as necessary. She expressed concern about the national debt. "It was a mistake to go into so much debt regardless of who the creditor is."
Davis said a large economy has helped to keep Texas from having as much economic downturn as other states. "I think the lending institutions in Texas have been more conservative in their lending practices."
Davis said money is safe because Congress recently guaranteed that the Federal Deposit Insurance Corp. would continue to guarantee bank deposits. The FDIC is an independent agency of the federal government. It was created after thousands of banks failed in the 1920s and early 1930s. No insured funds have been lost to bank failure since FDIC insurance began on Jan. 1, 1934.
President George W. Bush signed the Emergency Economic Stabilization Act of 2008 on Oct. 3. It raised the basic limit on FDIC deposit insurance to $250,000 per depositor. After Dec. 31, 2009, the insurance will return to its prior limit of $100,000.
Davis recommended students begin investing by purchasing certificates of deposit, or U.S. Treasury bills. A certificate of deposit, or CD, is a debt instrument that pays interest. Individual CDs can start at $100 and the maturity ranges from a few weeks to several years.
Competitive forces in the marketplace set the interest rates. The shortest term instruments issued by the federal government are U.S. Treasury bills. The maturity of a Treasury bill does not exceed one year and maturities of three or six months are common.
"If I was a young person, and could save $1,000, that is where I would invest," Davis said. "You're not going to make a great return in this market, but something is better than nothing."
John A. Worthington, senior vice president of corporate communications for Security Service Federal Credit Union, said, "A certificate of deposit is an attractive option because you get it at a set rate, for a set period of time, and it's insured by the federal government."
Worthington said students need to address credit card debt. "In general, our population is na've," he said. "If you can find me one kid in 10, who can give me a reasonable definition of what credit is, I'd be surprised. Some people do not even know what their balances are."
Worthington recommended, "Find a way to whittle it down and get rid of it because it will eat you alive. Find ways to economize. Do you need to drive everywhere? Are you close enough to walk or use public transportation?
"Look at your disposable income," Worthington said. "If it's disposable, throw it into your savings account. You should have a rainy day fund of three months minimum."
"It takes a conscious effort to change your behavior," he said. "The bottom line is get rid of your credit card balances, and then start investing."
Worthington said, "Texas being a very pro business environment" is one reason it is weathering the financial storm better than other states. Our government has been very proactive in bringing in business. Our mortgage lending is in better shape than the rest of the country."
Worthington continued, "You don't see a lot of subprime lending with credit unions at all. Credit unions have never in their history, since they were signed into law in 1934, been bailed out by your taxpayer money."
"All of your money on deposit is shares. If we went under, NCUSIF would cover your money," he said.
Created by Congress in 1970, the National Credit Union Share Insurance Fund insures member deposits in federally insured credit unions. Credit union insurance was addressed by the stabilization act in the same way as bank insurance.
Worthington said credit unions look at people differently than banks do. "Banks are for-profit institutions and they are run for the benefit of their shareholders. Credit unions are not-for-profit financial cooperatives," he said. "Everybody has an equal status regardless of what your income may be. We're going to take care of you because you are a member and a member owner."
Cynthia K. Propp, senior vice president, Alamo district manager for Broadway Bank, said, "Look for a financial institution that matches their services to your needs."
"A bank is different (from a credit union) in that we are more relationship driven," she said. "We have more services to offer; we are an organization you can grow with."
Propp said, "We (Broadway Bank) have a small board. We're local, which means we're very attuned to the community.
"I think it's really important to know your financial institution is strong, safe and that they'll be around," she said.
She said all banks were offered bailout money, but Broadway chose not to accept any. "Our capital exceeds what our capital requirements are," she said. "We'll be profitable for a long, long time."
Propp said Broadway has avoided costly mistakes by being "a conservative lending institution."
"We are not collateral lenders," she said. "We look at your credit."
Propp also recommended CDs for beginning investors.
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