With the “fiscal cliff” behind us, Americans now have a new concern on the horizon — the debt ceiling. The fiscal cliff resulted in an average tax increase of $1,600 per year for most taxpayers, and the impact debt ceiling negotiations will have is still uncertain. In light of the uncertainty, consumers are becoming even more diligent when it comes to their spending and saving habits.
To ensure your financial health for 2013 and beyond, prepare for and protect yourself against any economic eventuality:
1. Create and Follow a Budget
To control your spending, you need to monitor your spending — and that means getting on a budget. Use an Excel spreadsheet, an online tool like Mint, or good old-fashioned pen and paper to itemize all your income and expenses. Review bank and credit card statements to see exactly where your money is going. Once you have everything laid out in front of you, decide where you can cut back. This may require some tough choices and a little bit of sacrifice, but it doesn’t have to be forever and it’s worth it. If you can find 10 different ways to reduce your monthly expenses by $5, you’ll probably feel the pinch less than you would by removing one $50 expense from your budget.
2. Pay Off Credit Card Debt
Add up your total credit card debt and create a game plan over several months or years, if necessary, to pay it off. Figure out how much you can save by limiting personal purchases and look for ways to reduce your monthly bills. Bundling services, such as cell phone plans, cable TV, and Internet, is a great way to start. If you have savings, put a portion toward your high-interest debt since high-interest payments will eventually devour those savings. Once you’ve paid off credit card debt, commit to never carrying a balance again; if you can’t afford to pay for something by the end of the month, you simply can’t afford it.
3. Create an Emergency Fund
Ideally, you want an emergency savings fund that can pay for 12 months of living expenses. This is a lofty goal and for many seems entirely unapproachable, especially considering the ravages of high interest debt. However, even if you are tackling debt, you still want to have a savings fund in case an emergency car repair, or worse, strikes. Like most things in life, preparing for an uncertain future is a balancing act, and often requires some sacrifice. Give your emergency fund a boost by severely limiting discretionary expenses for the next few months. Once you’ve developed something of a cushion, you can ease off your austerity measures, while still keeping debt payoff and savings as priorities.
4. Save for Retirement
Medicare and Social Security are already struggling and may suffer further blows from a debt ceiling solution, which makes it crucial to save for your own retirement. Again, balance is key when faced with the different buckets in which to put your money. High interest debt will undermine most of your savings attempts, so paying it off must be a priority. However, if your employer offers to match contributions into your 401k, for example, be sure to take advantage of this offer.
Otherwise, it’s like turning down free money. But even if you aren’t so lucky, open a Roth IRA to contribute monies that you can withdraw tax-free when you retire. Investing only $50 per month could turn into almost $44,000 in 25 years if it annually earns 8 percent.
Tax rates have been unsustainably low for a while. And though politicians on both sides would prefer to keep them low, the money to solve our country’s financial woes has to come from somewhere. While most of us would like it to come from those who can best afford it — the financial elite — the truth is that it’s likely to come from us, the people. In becoming more disciplined with your money, you can not only lessen the blow of the coming debt ceiling deal, but you can prepare for any other financial challenges on the horizon.
— David Bakke is a columnist for the financial resource, Money Crashers Personal Finance. He writes about economic policy, financial planning, investing tips, and more.