Financial Moves To Make Before And After The Fiscal Cliff

fiscal-cliff-santoriniI 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!

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    This is truly disappointing, but entirely expected. Really, there’s nothing more important for government to do right now than to encourage a little confidence in a small but growing economic recovery. The tail winds are there, but a last second gamble on a November election in the House is worth every ounce of credibility this country has.

    I don’t think the average voter has the slightest clue what’s going on re: big government. People support their own form of big government. As long as their pet issue is at the top of the list, everything is going fine, whether it be abortion, a certain tax credit, a handout, perpetual war with Eastasia, whatever.

    The margin for pass-fail on this was pretty alarming. Boehner is going to have to do some serious political work to make up for the votes he lost. I’m not moving any money around ahead of the cliff, but I will have some dry powder ready to move in if I see lower prices in what I hold. I guess the good news is that this kind of ineptitude is running government and not America’s businesses. We can all be thankful for that.

    • says

      Dry powder for sure. Perversely, it’ll be nice to see a massive sell-off so we can build positions. I’ve got a good five that I’ve done research on where I will step in. Everybody needs to be doing some research now on potential buys.

      Only when the pain gets massive enough will our politicians be will to negotiate. Right now, things are just too swell!

  2. says

    I don’t think that Boehner’s proposal not making it through has anything to do with the eventual resolution of the fiscal cliff, nor does it impact the likelihood of going over it. Boehner is blaming the failure on the fact that many Republicans did not want to vote for it and appear to raise taxes. If you read between the lines, this isn’t exactly true. Many Republicans have accepted the fact that some tax increases will likely result. The issue is that Obama has made it perfectly clear that he would not sign anything to do with Plan B. So, many Republicans *will* eventually vote for something that includes a tax increase, but they’re not going to do so multiple times. They will only do so when there’s a proposal that’s likely to make it through both the House and the Senate as well as get signed by Obama. To me, this signals that Boehner is losing his own party, but in my mind it doesn’t really have anything to do with the eventual end game.

  3. JayCeezy says

    Great post, Sam. You see things as they are, not as you want them to be.

    In fairness to our politicians scampering out of the free-fire zone for the “Holiday” break, let us all remember that they have many former families to visit, as well as boyfriends, girlfriends, and booty-calls. It takes a lot of time for family values. Also, good idea about ‘taking the plunge’ before the ‘fiscal cliff’. You can get a divorce later, when the economy improves.

  4. says

    Being prepared is the right thing to do. I think we will go into 2013 without a solution, but I expect something will occur by mid January. We are running out of time to get it finished in 2012.

    This impasse or partisan politics is really starting to bother me. I would like to start a movement to “throw the bums out”. I would like to have politicians who want to solve the problem rather than so hold on to their party line. The problem with a movement is many of the wrong people would be thrown out.

  5. says

    This is one of the best posts I’ve read all week. A great brief for someone who has not been following the news.

    We have been planning for a circumstance like this for a while, so we don’t have too much scrambling to do. My main concern is the price of food over the next couple of years. As Americans we are over fed and under nourished to begin with and with food prices set to skyrocket the majority of the population might have a shock to their diets.

  6. says

    I remember a comment you left a while back Sam saying, “Come to Papa, Fiscal Cliff.” If we can prepare, that is half the battle as you say.

    I think people support big government as long as they don’t feel pain. It’s when the pain comes that the change happens.

    My focus is on alternate income streams at the moment. Doing the best I can :)

    • JayCeezy says

      @Jeremy Johnson, your point is taken. My thought is that the U.S. has encouraged and subsidized a growth in the part of the population that does not ‘feel pain’ in the cost of big gov’t. From illegal immigrants that live 6 in a 2-bedroom apartment and send 50% of their paycheck “home” (while still living better than they did in their country of origin), to teen moms who qualify for AFDC housing they could never pay for on their own, all the 47% of households that pay no Federal income tax, and a large swath of population that have no problem not finishing high school, not working, or working under-the-table without paying taxes, etc.

      Their votes count just as much as yours and Warren Buffet’s and Bill Gates’ votes. The pain is coming in the form of taxation, and this swath of the population won’t feel a thing. 80% of taxpayers won’t, either. Good luck to you with your alternate income streams.

  7. says

    Thanks for sharing the tips Sam! We’ll keep an eye on the news, but our focus will be taking care of what we can with our finances. I didn’t expect a resolution to be made this week and I think it won’t happen until mid January or a bit later.

    We’re focused on getting our finances squared away – paying down debts, building up income with my business, and looking at a joint project that will use both my and my husband’s talents.

  8. J in Florida says

    Sam,

    How do you plan to allocate your 401(K) account if we go over the cliff?

    From your post earlier this month (http://www.financialsamurai.com/2012/12/16/how-to-reduce-401k-fees-through-portfolio-analysis) you are currently invested in:

    – Fidelity Blue Chip Growth fund – 41.6% (which will be sold for a Vanguard Large Cap fund)
    – Vanguard Precious Metals and Mining Fund – 25.3%
    – Vanguard Energy Fund – 10.5%
    – Vanguard Information Technology Fund – 22.4%

    In this post you said, “The only long position the comes to mind which will outperform in a fiscal cliff is: gold related assets.”

    Are you going to re-allocate toward the Precious Metals and Mining Fund?

    If so, how much?

    Thank you! Fantastic blog, the best yet!

    J in Florida

    • says

      Good question. As you can seen from my latest 401K allocation, 25% is in the precious metals and mining fund which will outperform if there is no budget resolution. I’ve got another 8% or so in a net short hedge fund which means my total portfolio is roughly 33% positioned for a bad case scenario.

      The problem I have is that I will incur a 1% penalty if I whip around my one fund within 90 days of purchase, and my Vanguard funds within 6 months of purchase. As a result, I’m not whipping them around, but letting them ride b/c I still have hope of a resolution. Instead, I’m hedging out my bets with my after-tax E*Trade account and with Structured Notes.

      Directionally, I’m bullish, and the 401K is for a longer term holding horizon.

  9. says

    Sam, I’m wondering if you believe strongly enough to bet on this happening?

    I just spent way longer reading about this yesterday than I should have since it’s not my government. You can take pride in your politics being great entertainment. If only you could license broadcasting rights to pay off the debts… I think this is worth a lot more than the Olympics.

    It seems that any politician who agrees to a deal before 11:55pm on Dec 31st will be unelectable so I expect they won’t be going to many New Year’s Eve parties (conversely everyone who does will be watching CNN!). Like with wars, leaders are usually smart enough to do the right thing once all other options have been exhausted. But once in a while mistakes happen and they get locked into a path they know is bad.

    You’re right that it’s better to be prepared than surprised! I hope not to see the effect this has on people who never had a chance to stop what’s happening to them. If it does happen I will be happy to rebalance into any markets that are falling. Maybe my slightly overweight EAFE fund will suddenly be the strong part of the portfolio!

    • says

      I was completely convinced there would be a compromise by year end, but after the rejection of Plan B, I’m less than 50% convinced there will be a solution in 2012.

      Snatching defeat from the jaws of victory as they say!

      As such, I’m hedging and expecting the worst. My fund is outperforming the broader markets by 5%, so that is my wiggle room.

  10. says

    I agree that we can’t count on the government for anything. I just wrote a big post about something that happened to me at work (be on the lookout for it) and I am going to fight for myself tooth and nail.

    Outside of the traveling I’ve been doing, I haven’t been spending much money. I bought minimal gifts for the holidays and don’t have any big purchases planned. I have my doubts that we’re going to get good news from the government in the next week, so I’m also preparing for an ugly start to the new year.

  11. lurker says

    always good to have some cash ready in case a panic creates some bargains but you should know it makes me uncomfortable when you say what is “going to happen”. No one knows that. You should be smart enough to state that up front so the inexperienced investors reading this blog don’t lose money trying to “follow” your advice…the future is unknowable by everyone. even you Sam.

    • says

      My advice is that there is a greater than 50% chance the Fiscal Cliff will happen. That’s very different from stating something is going to happen. If the FC does happen, I provide some suggestions to readers.

  12. Jason says

    Your best post ever Sam! I was beginning to think that you were some pro big government bleeding heart liberal. Its nice to see that you agee big government is not the answer.

  13. Investor Junkie says

    Is the real end of the world? If Sam is worried about the cliff, that means I must buy stocks!

    In all seriousness this will be a buying opportunity in the market. I have my money ready!

    Congress will eventually do something. They are just unreliable.

  14. wade says

    we have been buying up dry goods and putting them in airtight packages, canned goods also.and we have been hanging onto any coins old enough to contain some silver.we have also been using no contract cellphones and are prepared to not have them if needed.we have also been buying up coffee and salt..

  15. says

    I’m taking a far more positive approach, betting that the government will either figure this out or our country will survive if it doesn’t. Like Investment Junkie above, I have my money ready so that if/when the market drops because of panic, I’ll be buying stock on sale. I think we’ll all be just fine. But maybe that’s because I’m a saver and am in comfortable shape because of it.

    My advice is to save money, people. But that doesn’t just apply to times like these, it applies to all times. Save.

    • says

      Hi Kraig, I hope you’re right and everything will be OK. Although we’ve still got time left, the window is closing fast. I am kind of happy that Congress is hosting a Sunday session before Dec 31. Giving taxpayers their money’s worth!

      Hope you save lots of money in 2013!

  16. says

    I am just baffled why nobody does anything about it. American people are one big power in the world and they showed it up several times in history, and this time? Nothing is happening! Are we really that screwed up?

  17. says

    @Young, Cheap Living
    I am doing the exact same thing, saving, saving, and saving. If the cliff happens we may see some nice stocks cheap out there and I will be buying too (as I am already adding in small portions). I am also buying gold when it was recently on sale, which may skyrocket due to the cliff issue.

    • says

      Thanks Tahnya. When your book is out, you are welcome to write a story that relates to your book and guest post here if you’d like. We can go over some ideas more when I know more about your book. Thx!

  18. says

    Sam,

    I always love your posts, but COME ON, MAN! This was fear mongering at its best (or worst?). Reading this I’m thinking this isn’t even like you to write.

    Let’s calm down a bit, shall we?

    I don’t know what else to say….this is not great advice.

    T

    • says

      Since I wrote this post, the Dow sold off around 350 points (3%) and congress hasn’t voted on a comprehensive budget package yet. Not sure how saying going over the fiscal cliff is now more than a 50% chance on the post.

      If the Fiscal Cliff does happen, with not even a patch (looks like there will be a can kicking patch), then all the moves I recommend are fine.

      Don’t be afraid. Be prepared.

      S

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