Watch Out for Your Personal Fiscal Cliff

If you are paying any attention to the media at all these days, you may think there is only one thing on everyone’s mind (okay, two).  While we do not want to add to the noise out there on the “fiscal cliff” facing the country, we all may be dealing with our own personal fiscal cliff:  the need to significantly raise our earnings or cut spending to reduce our personal debt burden.

Earnings:  If you are employed, there may not be much you can do to increase earnings except hope your work ethic is rewarded. The income you derive from investments will most likely be affected.  Odds are, tax rates on dividend income and capital gains will be going up next year.  The best defense is to save as much as you can in tax-deferred accounts like IRAs or retirement plans (401k or 403b), which will not be affected by changes in these tax rates.  For assets that you invest outside your tax-deferred accounts, wait until final decisions on taxes are made before changing your investment strategy.

Spending:  This is one area that we all can control as we face the biggest spending season of the year.  Consumers are already showing the willingness to splurge on holiday gifts after a year or two of holding back.  To throw a wet blanket over that festive feeling, there will inevitably be federal spending cuts in future years, with a ripple effect on companies that supply goods and services to the government.   Resultant cuts may not bode well for a job market that is clawing its way to recovery.  So before you spend, make sure your rainy-day savings are well funded.  It will make the belt-tightening easier to swallow next year and beyond.

One tradition many have adopted for their extended family for holiday gift giving significantly reduces the stress on time and wallet.  They pick one person’s name randomly out of pool of family members. Spending limits are established to make it fair.  The amount of dollars and time you save from not having to buy a gift for everyone in your extended family could be put into the rainy-day fund or donated to your favorite charity instead.  In the latter case, Uncle Sam chips in a tax deduction for it next April.  A gift that gives back.

Refinance:  Another way to reduce what you spend is to refinance your mortgage debt.  Rates are still at historic lows, and lenders a little less reluctant.  If your credit is decent, and home prices where you live are starting to rise, you could lower your monthly payments and the total interest you will pay on your mortgage.  Be prepared for an abundance of paperwork and requests for information, much of which is intrusive.   But you will be smiling all the way to the bank for the next 30 or so years.

“By sowing frugality we reap liberty, a golden harvest” ~ Agesilaus

 Ina Fernandez CPA is Managing Director of Liberty Capital Management, Inc.

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