In a 1789 letter to French scientist Jean-Baptiste Leroy, founding father Benjamin Franklin wrote, “. . .in this world nothing can be said to be certain, except death and taxes.” Of course, unlike the rest of us, Ben never went over a fiscal cliff and into a new economic world where even taxes were anything but certain – or at least what they will be and who’s going to pay them.
So if you wanted to plan your personal finances prudently for the forthcoming year, it’s that uncertainty of where we will land – once Jan. 1 has come and gone without a deal in Washington – that will have to provide the basis for your upcoming financial decisions.
Here, then, are some tips based on what we know we’re certain we don’t yet know:
- Don’t buy long-term bonds or treasury notes. With the 10-year note yielding 1.7 percent,there is no reason to lock in such a low-interest rate for such a long term. Interest rates can’t get much lower, which means they can only go up in time.
- Buy gold. Gold and other precious metals will benefit as a store of value as long as the Federal Reserve continues to keep the dollar cheap.
- Ratchet up liquid your reserves. Going over the fiscal cliff will raise taxes an average of $3,500 per year – and an average of $2,400 for families with incomes between $50,000and $75,000K. In addition, without a deal, the Alternative Minimum Tax will snag an additional 28 million taxpayers. Those making over $100,000 will be charged an average increase of $3,700. And the IRS will demand its pound of flesh. If the general economy slows down too much, a recession is possible and unemployment may increase with the nation losing up to 3.4 million jobs. Make sure you have several months’ worth of cash on hand.
- Beware of variable-interest loans. If the U.S.’s credit rating takes a hit, interest rates could rise quickly in response.
- Utilize your IRA. You will have until April 15, 2013 to sock away more money into a retirement account like an IRA or 401(k). If your taxes go up next year, you will want to write off as much tax liability as possible for 2012.
- Reduce your stock portfolio. This is especially true if you have dividend-paying stocks. The market, in particular, hates uncertainty. So, a likely sell-off will eat into your stocks’ worth. Whatever you sell now you can buy back later at a cheaper price. Also, if dividend taxes and/or capital gains taxes do increase, you might as well pay them at the lower 2012 rates.
Oh, and by the way, you might want to get yourself a cow. If Congress doesn’t provide a fix for dairy price supports, also due to expire on Jan. 1, the price of milk could double.
Happy New Year and happy landing!
ABOUT THE AUTHOR: Jeffery Sterner writes and blogs about personal financial well-being and issues that influence it for Debt.org, America’s Debt Help Organization.