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Video: Will U.S. downgrade impact my savings?

  1. Transcript of: Will U.S. downgrade impact my savings?

    ANN CURRY, co-host: This morning on TODAY'S MONEY , protecting your retirement savings. A lot of Americans have concerns given the recent dip on Wall Street and the first ever downgrade of the US government 's credit rating . So what does it mean for all of you? Well, Farnoosh Torabi is a contributor to Yahoo! Finance and also the author of "Psyche Yourself Rich." Farnoosh , good morning.

    Ms. FARNOOSH TORABI (Author, "Psych Yourself Rich"): Good morning, Ann.

    CURRY: So the question I think a lot of people are asking now is how will this downgrade affect their personal savings, their portfolios? Is there an easy answer to that?

    Ms. TORABI: Well, the economic answer to that is that when there is a downgrade on debt at the American level, at the government level, that's going to trickle down to the consumer level to Main Street to mean higher interest rates on consumer loans , ranging from mortgages to car loans, your credit cards . All those interest rates theoretically could go up in the aftermath of a downgrade. So that's going to put pressure on personal savings because the more you have to pay to borrow the less you can do to save.

    CURRY: But do we have any idea how much they might go up, given that the two other agencies, credit ranking agencies did not actually lower the -- and also...

    Ms. TORABI: Right.

    CURRY: ...because of the White House 's argument that actually S&P actually made a mistake, a $2 trillion mistake.

    Ms. TORABI: Right.

    CURRY: I mean, is there some doubt about how much, or even if the interest rates will go up?

    Ms. TORABI: Sure. Well, that's a good point. Because it's just one agency we're dealing with right now that has downgraded US debt , the aftermath is not going to be as severe. I don't think we're going to see interest rates skyrocket. But here's the other thing, Ann , this downgrade it's unprecedented. It has added uncertainty to the financial markets, so we may see prices on everyday goods go up because corporations want to have the sort of pre-emptive strike against what may be the worst case scenario down the road of another recession happening. So we may see prices go up on oil, on gas, on food, on clothing, which can hurt ultimately personal savings.

    CURRY: So you're really saying that while we don't know we really should protect ourselves, it sounds like what you're saying.

    Ms. TORABI: Absolutely. You can't control what happens in DC , but you can control your ability to save money .

    CURRY: OK, talk about saving money . Our 401(k)s.

    Ms. TORABI: Yes.

    CURRY: Those of us who are lucky enough to have them, what can we do?

    Ms. TORABI: You don't want to make any knee-jerk emotion-driven movements in your 401(k). Remember that your 401(k) is a long-term investment vehicle, right? And as long as you are diversified, you have a risk-adjusted portfolio, meaning that your portfolio speaks to your age and when you want to retire. That's really important. I think everyone should take a moment to look and review it, how their allocation is spread. Make sure that if you're young, you know, you can afford more risk. You should be in the market. If you're approaching retirement, you're in your 60s, you want to be more allocated towards what I call fixed income assets, like bonds, CDs , because you take the guesswork out of the return on your investment.

    CURRY: So they're going to be less likely to fluctuate is what you're saying.

    Ms. TORABI: Yes. Yes.

    CURRY: So that's a surer bet. So depending on how old you are, how soon you need your money ...

    Ms. TORABI: Right.

    CURRY: ...then you can decide whether or not you want to move your money around and choose some of these safer places to go.

    Ms. TORABI: Exactly. Once a year I think is a good time to review. It may be even now.

    CURRY: Anyway.

    Ms. TORABI: Anyway.

    CURRY: OK. How much should people think about staying out of this market, though?

    Ms. TORABI: Mm-hmm.

    CURRY: I mean, some people are sort of saying, 'Hey, this might be an opportunity,' other people saying, 'Are you crazy?'

    Ms. TORABI: Right.

    CURRY: I mean, how -- what would your best advice be to the average American about that?

    Ms. TORABI: I would say think about your five-year plan. What goals do you want to hit in the next five years, whether it's sending your children to college, buying a home, starting a business. What are those price tags attached to those goals and whatever money you need to make sure you accomplish those milestones, take it out of the stock market because five years, frankly, is not enough time to really afford the volatility to lose that money . Five years I don't think is a long enough time to recoup all of those losses in order for you to move forward with your life.

    CURRY: So that's a good rule of thumb.

    Ms. TORABI: Yes.

    CURRY: Meantime, you know, it seems as though we hear all these experts, you know, from -- on CNBC...

    Ms. TORABI: Mm-hmm.

    CURRY: ...or just sort of -- and analysts in general, they seem to sort of get an idea they know that the market's going to dip or not...

    Ms. TORABI: Right.

    CURRY: ...depending on -- what's the best advice you can give the average American in terms of how to know when things are not going to be so good?

    Ms. TORABI: Well, I think even the best of investors don't really know on a day-to-day basis. But this is something that really -- I wrote about this in my book, recessions, Ann , happen about every five to six years.

    CURRY: Hm.

    Ms. TORABI: Looking back to as early as 1797 , the Great Panic , when our country went into a credit crisis along with England . Ever since then we've had sort of a contraction or recession every five to six years which, again, is why I say have a five-year plan and keep that money safe in liquid savings.

    CURRY: Which is also to say we actually end recessions, too...

    Ms. TORABI: Right.

    CURRY: ...pretty frequently.

    Ms. TORABI: We've very cyclical.

    CURRY: OK, Farnoosh Torabi , thank you so much for some good advice this morning.

    Ms. TORABI: You're welcome.

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