Financial Moves To Make Before And After The Fiscal Cliff
I never thought we’d go over the fiscal cliff, but it turns out the chances are now over 50% after Boehner’s Plan B can’t even get enough Republican support. Raising the absurdly low income threshold for tax increases from $250,000 per couple to $1 million per couple sounds like a fantastic compromise.
Nobody making over $1 million will ever publicly complain about their taxes going up unless they want to face the mob. Those making less than $1 million a year will get their moral victory of sticking it to the real rich, who are the millionaires and billionaires of America, not the couple making $350,000 living in San Francisco with two kids. They are well to do, but they aren’t rich when it costs $1.5 million for a starter home!
Since Obama proposed a $400,000 income level before taxes will go up, and Republicans can’t even agree on a $1 million income level until taxes go up, it’ll come to no surprise if a deal doesn’t happen before year end. I was really hoping for something in between $400,000 and $1 million so they could move on with the real issue, which is overspending! It’s baffling why the government can’t take steps to spend within its means.
It doesn’t sit well with me that our politicians went home for the holidays with such a huge issue still unresolved. We pay their salaries and huge pensions! I still have some hope for at least a “Fiscal Patch,” but just in case, here are some things to consider.
FINANCIAL MOVES TO MAKE BEFORE THE FISCAL CLIFF
* Look for puts or shorts. We’re already seeing a sell-off in the markets after a shelving of a “Plan B” vote. If we go over the cliff, the S&P 500 could easily correct by 10% before Capital Hill gets so much pressure from the people to finally force a deal. Hopefully you’re outperforming the markets after taking profits post QE3 and jumping back in after the 7.5% correction post Obama reelection. If not, be wary. With greater than a 50% chance of a fiscal cliff happening, it is reasonable to have a net neutral portfolio that consists of 50% shorts, or at least a hedged portfolio. You’re now playing for alpha, not beta. The only long position the comes to mind which will outperform in a fiscal cliff is gold related assets.
* Delay your refinance. This may sound counter intuitive if the global stock markets start collapsing, however, hear me out. There will be a huge flight to US Treasuries (“flight to quality”) ironically if our politicians can’t agree. Treasuries go up, yields go down, and mortgage rates will also go down. You’re already seeing the 10-year yield come down to 1.75% from 1.8%. Expect the 10-year yield to hit 1.6% or perhaps even lower if we go over.
* Lock in your mortgage quote. On the flip side, if you think things are going to be extremely bad, you may want to lock in your mortgage rate for 60-90 days because banks may very well STOP lending and become even more conservative if there is gridlock in Washington. Regardless of the scenario, whenever you see a rate that’s more than 0.5% lower where you can break even in under 24 months, go for it. It’s free money.
* Contact everybody who owes you money. If people who owe you money from a bet or a loan haven’t paid you back, they certainly will be less inclined to pay you back once the stock market crashes and the economy goes back into recession. Just tell them you have a financial emergency and will really appreciate it if they pay you back. Getting something is better than nothing. For those who still owe me money for the Obama bet, sorry Mitt lost, please pay up!
* Get your finances in order. If you are not tracking your assets, liabilities, spending, and savings, you need to take action before the world of pain comes crashing down on you. Ignorance is not a good strategy when bad things happen in the economy or on Capital Hill. With ignorance, you could literally wake up six months from now and see a good chunk of your net worth gone because you failed to adjust your exposure and your habits. It’s hard to build real wealth over time when you don’t know where your money is going!
* Submit all applications. Whatever you are applying to, graduate school, vocational school, fellowships etc, submit early, rather than later. If we go over the fiscal cliff, there will be a SURGE in applications for everything. We saw a 30-40% YoY increase in business school applications during the recession because people were getting blown up left and right. Submit early so you don’t follow the herd.
FINANCIAL MOVES TO MAKE AFTER THE FISCAL CLIFF
* Prepare for hunger. Get used to eating on 50% of normal caloric intake now. One of the biggest points I don’t hear many politicians argue over is what happens to Federal Unemployment Benefits. As of now, all federal unemployment benefits expire on 12/29/12, leaving over two million Americans in the literal cold. If you are one of the two million reading this, cut out all expenses immediately. Do not buy presents. Return all gifts you’ve bought. Return gifts you’ve received and ask for cash instead. Apply to as many temporary holiday work jobs as possible. As far as politicians are concerned, you are going to be a casualty of war. The war is about who can retain the most power and not about helping you.
* Stop spending any money. Because you are uncertain about your future, you need to cut costs to the bone. When everybody collectively stops spending money, the economy enters a recession. When we are in a recession, more jobs will be lost and asset prices will stop inflating. The three year bull market we’ve had is over. It’s time to get realistic about your potential income projections.
* Start new income streams. Not spending money can only take you so far. You’ve got to consider alternative income streams now. Increase your money strength for goodness sake! You should have been working on new income streams way before now, but hey, nothing like a good financial meltdown to scare you straight!
* Ask her or him to marry you ASAP. It’s hard to ask her to marry you before a budget decision since it’s the holidays and all. However, now that we’ve gone over the cliff, you need to ask her to marry you now before you become a financial disaster. Let’s be frank. Women would rather be with financially secure men than men who are insecure, neurotic, and poor. Your chances of becoming insecure, neurotic, and poor have now gone WAY UP, especially if you don’t have multiple income streams and a healthy expense coverage ratio! The last thing you want is to be broke and alone.
* Reconsider ever supporting big government again. For those of you who are pro big government, why? This is what happens when you let politicians who only care about power get in control. They spend your money frivolously on their constituents. When they run out of money, they convince the majority to go after the minority to raise more taxes to spend on themselves. Politicians have a limited term in office. Their goal is to amass as much power during their window as possible by providing as many political favors as possible, so that once they no longer have power they can still live off their goodwill. Ever wonder why politicians often leave politics as mega-millionaires?
* Get a handle of your finances. The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online software which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.
The best feature is the 401K Fee Analyzer which has saved me over $1,000 a year in portfolio fees I had no idea I was paying. Personal Capital takes less than one minute to sign up and is the most valuable tool I’ve found to help people achieve financial independence.
PREPARE FOR THE WORST BY EXPECTING THE WORST
Only when things get absolutely bad enough will there be motivation to change on Capital Hill. Clearly, things are not bad enough since no budget has been passed. President Obama will take Air Force One and enjoy a two week holiday in Hawaii. Our Congressmen and Senators will probably also take their yachts out with their families without care for a budget resolution.
Please use this budget fiasco as a reminder not to depend on the government for anything. You must fight for yourself and for your family. The government can’t even take care of all its Veterans back home. What makes you think they’ll take care of you? Here’s one happy note to end on. All of our politicians are much wealthier than the average American. As the stock markets get crushed, know that they are all losing much more wealth than the people they supposedly serve! Go USA!