Shotwell Rutter Baer

Are you affected by the Michigan State University salary cuts?

There’s a lot of uncertainty in the world of higher education right now. Universities around the country are trying to figure out what Covid-19 will mean for students and instructors as we head into fall and winter. With the new semester underway, there still seems to be as many questions as answers at this point, but one thing is certain: this fall will be different.

During this turmoil, Michigan State University has announced salary reductions of 0.5% up to 8%. In addition, they have reduced the employer contribution to faculty retirement accounts from a very generous 10% match to 5%. The average salary cut is 2.3%. At this point, nobody knows for certain whether these cuts are temporary, permanent, or just the beginning.

Related: Coping with the MSU Retirement Plan Match Reduction

Coping with a pay cut is never easy. Here are some financial planning tips that we hope will help:

A 2% cut in pay certainly has its impacts, but after taxes and other deductions, the net change may not be that drastic. It’s time to be prudent about spending and look for places to adjust, but your financial world is probably not crumbling yet.

The best way to avoid living paycheck to paycheck and to deal with economic uncertainty is to know that you are living within your means. It is important to understanding where your money goes. There are many systems and tools out there to help with budgeting. It doesn’t really matter what system you adopt – pen and paper, spreadsheet, or a computer app all work well. The best one is the one that you will use consistently.

A good budget starts with funding necessities first and discretionary stuff last. To reduce your budget, work in reverse, looking at discretionary spending first.

It’s also about balance. If you can’t find enough reductions by cutting discretionary spending, or if you find you’ve had to cut all the fun stuff out of your budget, look at your necessary spending for ways to reduce your fixed overhead over time. This may mean refinancing your home to lower your mortgage payment, downsizing, or driving a less expensive car. Changes like these can make a big difference over time, but they don’t have to be done all at once. Think strategically about what is important to you and your family if these cuts persist or worsen over the coming years.

But if you find you’re dipping into your contingency funds regularly go back to the budget and look for additional cuts. The goal is to maintain and rebuild those savings over time if possible.

Go beyond cutting the budget to break even and look for savings. Funnel that extra money into a regular bank savings account or money market. This will provide a cushion against future cuts and make sure that shocks to your budget (unexpected car repairs, home maintenance, or health issues) don’t lead to credit card debt or other problems.

Too many people put off budgeting issues until their credit cards are filling the gap, they start missing payments, and late fees add up to long -term damage. If you can’t find ways to fix your budget and you worry about having problems with your creditors, talk to your creditors before it’s too late.

We can help you figure out your spending priorities and create a financial plan focused on your values. If you need help working with your creditors and dealing with debt, we have resources that we can recommend.

Unfortunately, economic uncertainty is a fact of life. The Covid Pandemic has reminded us all that things we thought were safe and certain can change quickly. Hopefully, these cuts will be temporary, but there is no doubt that higher education will not look the same regardless of how the health crisis plays out. Implementing these strategies should help see you through the current turmoil. Budgeting strategies and creating an emergency fund can put you in good stead for whatever the future might bring.

Contact Shotwell Rutter Baer today. 

Does the 2020 election have you thinking about your money?

Every four years America goes through a Presidential election. Every four years clients ask where we can move their portfolios to be safe if one side or the other is victorious.

This year is no different. With political passions higher than normal and a sharp contrast between the candidates, the feeling that the 2020 election will have an outsized impact on portfolios will likely be more pronounced.

Looking at the historical numbers, the market has fared better in non-election years than it has in election years. The Standard and Poor’s 500 has an average of:

This suggests that the election serves as a distraction and creates extraneous volatility, while in other years it’s business as usual. However, when 2002 and 2008 are removed from the calculation (both horrible market years for reasons that had little or nothing to do with the election) the overall election year returns become very similar to non-election year returns.

Historically, the markets have not cared about which party was in power. The market is more concerned with the economic cycle than it is with who is in office. While economic policy is important, it doesn’t often change the economy’s trajectory. Since 1933, the average annual return for the Standard and Poor’s 500 during an election year when the Democratic candidate wins has been 14.6% and the average annual return in years when a Republican wins has been 10.4%.

More importantly, a year later the market’s average return has been 12.8% with a Democrat in office and 12.3% with a Republican in office. This is a negligible difference between the parties in leadership. After a year, excitement or concern over election-year promises have worn off, the new President has been forced to sit down and govern, and the market and economy go on with business.

Many factors influence the direction of the stock market. It is human nature to focus on one potential catalyst and look for cause and expected effects, particularly something like an election that is fraught with emotion and uncertainty. We want to be able to mentally connect an event – the election – with an outcome – what happens in the markets.

When we look at history there is no discernible pattern between the party in power, be it the White House or Congress, and market outcomes because the factors that influence the market are so much bigger and broader than domestic politics and include:

Specific to this fall’s election, a lot of the focus has been on the Democrats’ pledge to reverse the corporate and individual tax cuts from 2017 and to focus on sustainable energy and climate change initiatives. For this part of the conversation, let’s focus on the potential effects of a Democratic victory, as a Republican victory mostly reflects the status quo.

The current top individual tax rate sits at 37%  (well below the historical average.) While this lower tax environment has helped the economy, the previous top rate of 39% was still way below the US historical average of 60%. Returning to that level is not an extreme change and takes taxes back to where they were during the 1990s, one of the longest sustained economic booms of our history.

Prior to 2017, the US corporate tax rate was 35%, the highest among the world’s industrialized companies, and a competitive disadvantage. Although, due to the structure of our tax code, many companies paid a lower effective rate depending on business conditions. The new US corporate rate of 21% puts the US just below the average for industrialized countries.

Increasing corporate taxes could certainly affect the US economy and the markets.  If companies spend more on tax, they show lower profits, and profitability is what drives the market’s growth. However, even a return to the old corporate tax rate needs to be taken in context: the US economy grew under the old tax structure. Furthermore, the total tax burden as a percentage of gross domestic product, at 26%, was still well below the average for the industrialized world which stands at 34%.

It is also important to keep in mind that the structure of our democracy makes it difficult for one party to make extreme changes in one direction or the other. Extreme change calls for extreme circumstances, with policy requiring a party to convince the extremists and the vast majority in the middle to go along with it. And even in those circumstances, the party in power always governs with an eye to the next election.

We do have extreme circumstances right now: Covid-19 required a complete shackling of the economy last spring and will likely dominate the headlines until effective vaccines and treatments are in place. This extreme circumstance will force a re-shuffling of priorities, despite campaign rhetoric. The main priority for whichever party ends up in the White House and Senate will be to get the economy back on its feet,. The prescription for a return to growth will not likely include extreme tax changes any time soon regardless of the winner in November.

How the Democrats’ focus on sustainable energy and climate change might impact the markets is likewise difficult to assess. While these initiatives would most likely be a negative for the fossil fuel industry, increased government spending to promote alternative energy sources and other similar initiatives would boost other industries to the point where the net effect on the economy would be neutral or even positive.

The winners and losers might change, but a diversified portfolio would not necessarily see a negative impact.

While all of this equates to increased uncertainty, keep in mind our philosophy that the markets are efficient. What that means is that the market’s current level reflects the average opinion of every market participant based on the known news. While there’s been a lot of talk about extreme changes in policy, the market did not move negatively based on news that polls are indicating a solid lead by the Democrats (as I write this, the market has been down over the last three days following two months of solid returns. The factors contributing to that decline appear to be profit-taking more than policy-driven). If the majority of market participants anticipated a regime change would be a negative for the markets we’d expect that selling to begin as the poll numbers solidified.

When all is said and done, we cannot predict how the 2020 election will influence the markets. However, if history is any guide, volatility around the election should be short-lived and manageable and the longterm effects of the election’s outcome will be just one of many factors driving the markets.

Trying to time investment strategies around an event such as the 2020 election is not a viable longterm strategy for success. Staying invested, year in and year out is the key to success. Trying to avoid bad days in the market means you’ll probably miss some of the best days as well. As the chart below “Timing the Market” illustrates, moving out of the market after a downturn to wait for better times drastically reduces the outcome. Best to stay put and stick with your strategy.

Welcome to The Kitchen Table Finance podcast. Join Dave Shotwell and Nick Nauta as they cut through the complexity of financial planning and serve bites of investment advice that are both personal and practical. 

Dave: “I’m Dave and I want to help you connect your money to what you value in life, and then help you make financial decisions to make it a reality. We’ll talk about how you spend your money now and in retirement.” 

Nick: I’m Nick and to me, living a rich life is more about who you are and being able to pursue your dreams, rather than how much money you have. Let’s talk about how your money can work for you so you can have the life you want.” 

Gather round and follow the Kitchen Table Finance podcast to learn about money and simple ways you can invest right now. Visit our blog for more practical advice and contact the team for personal planning by emailing [email protected].