First, a little background. The PFSi is a quarterly economic indicator that measures the financial standing of the average American. It’s calculated as the difference between two sub-indexes: The Personal Financial Pleasure Index, which measures the growth of assets and opportunities, and the Personal Financial Pain Index, which calculates the loss of assets and opportunities. Most recently, the Pleasure Index (73.9) greatly outweighed the Pain Index (41.9), bringing the PFSi to a positive reading of 32.0, the highest reading in the 25-year history of the index.
Robert Westley, CPA/PFS and member of the AICPA’s Personal Financial Specialist (PFS) Credential Committee, spoke to AICPA Insights about the index results and what the record-setting quarter means for Americans.
The PFSi just reached an all-time high, indicating that the average American should be feeling a strong sense of financial well-being. Is this consistent with what you are seeing? What are you recommending to your clients?
Robert Westley: Investors seem to have a stronger sense of financial well-being driven by a robust market and economy. Nevertheless, it’s critical to remember that the economy is cyclical, and the prosperous times won’t continue forever. As we begin to see short-term volatility pick up, Americans shouldn’t lose sight of their financial goals. I suggest creating thoughtful financial plan that aligns their portfolio with their goals. Remaining focused on your goals and appropriately positioning a financial plan can help safeguard finances.
Job openings and the market both reached record highs in Q3, boosting the Personal Financial Pleasure index to an all-time high. While times are this good, where should Americans place their focus?
RW: As personal financial pleasure reaches an all-time high, it’s an excellent time to review all outstanding liabilities and decide whether any debt should be paid down or paid off. Taxpayers will generally want to pay down high-interest rate non-tax-deductible consumer debt, such as credit cards and personal loans. Further, as discretionary income rises, Americans should ensure they have ample cash on hand for when times are not as good. This is critical to managing emergencies and hardships without resorting to high-interest debt. While times are prosperous, consider investing in yourself by taking classes to learn a new skill that can lead to a new position with higher lifetime career earnings.
Per the index, the stock market now accounts for nearly 1/3 of all financial pleasure. Recently, the market has been experiencing a lot of volatility. In this current environment, what should Americans of all ages keep in mind?
RW: It’s essential for individuals of all ages to maintain focus on their long-term goals and stay the course. Keeping the funds needed in the short term in safer, less volatile asset classes, such as cash and short duration fixed income, will provide a buffer against the volatility. For investors trying to build up cash value, volatility can present an opportunity to invest at attractive valuations. This can be especially powerful for younger investors who have long-term goals. Volatility can also offer investors the opportunity to collect tax losses in their portfolio to offset taxable gains.
In September, the Federal Reserve announced plans to increase interest rates — In what ways can Americans expect a rising interest rate environment to impact their financial picture?
RW: Borrowing plays an important role in financial planning but needs to be revisited as interest rates rise. Consumers should keep in mind that as interest rates increase, it becomes more expensive for banks to borrow and ultimately that expense is passed along to the consumer. Before future rate hikes, consumers should look to pay down their credit cards and other high-interest bearing debt as much as possible. Any future interest rate increase will result in higher monthly payments on variable rate debt and therefore less disposable income. Not to mention, inflation is forecasted to pick up, and it’s important for Americans to factor that into their financial plan as well. It’s crucial for individuals holding large amounts of cash and cash equivalents to remember that to the extent their assets do not keep up with inflation, their purchasing power will diminish over time. One positive to note is that as banks raise interest rates, it presents an opportunity for Americans with cash on hand to shop around for a higher rate on their deposit accounts.
It is great news that the average Americans’ financial satisfaction is at an all-time high, but for those who are not feeling the benefits of this record, where would you suggest they begin to improve their financial situation?
RW: The current environment is a perfect time to analyze your financial situation. You can do this by simply taking an inventory of your assets and liabilities and putting them down on a single sheet of paper. Then calculate how much money you’re bringing in after taxes and how much you have left after covering your monthly bills. This process will help you to become more aware of where your dollars are going and help to reduce frivolous spending. If you have extra cash, consider increasing your savings rate. This may be an excellent time to build up that emergency fund aiming to cover at least 6 months’ worth of living expenses.
Check out the free resources available on the AICPA’s 360 degrees of financial literacy website. Once there, you can find budgeting tips, savings calculators, articles full of insight on a wide range of financial topics, and even a tool to help you build your own financial plan.
Jon Lynch, Manager, Public Relations, Association of International Certified Professional Accountants
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Originally published by AICPA.org
