The fiscal cliff may be resolved but the deal only makes our “national debt cliff” even bigger. While we all hope our politicians can find a way to implement the necessary changes to reduce our national deficit AND national debt, we all must be prepared for how these changes will affect our lives. It’s been said that if we don’t learn from history, then we are destined to repeat it. We should not let the valuable lessons of our most recent recession and now current financial pickle go unlearned. These are some steps I encourage you to consider taking as a way to prepare for what lies ahead, no matter how things unfold:
Build an Emergency Fund
If there is one thing on which most financial planners agree, it’s the importance of maintaining an emergency fund. Years ago, when I was just learning about financial planning, the rule of thumb was having three to six months of necessary expenses set aside in a safe, accessible account so that if something unexpected came along, you could handle it. Nowadays, with unemployment and other financial “emergencies” lasting much longer, it may be better to have eight to twelve months of expenses set aside.
In addition to having money “in the bank,” I would also encourage you to consider having cash on hand—one to three months worth—just in case things get really out of hand and you are unable to get to the bank to withdraw money. If you do this, don’t tell anyone, and consider buying a wall safe or one large enough such that no one could carry it off. I know some of you will feel uncomfortable doing this, so if that’s the case, don’t worry about it and just stick with the deposit account.
Live Below Your Means
You would think by now that this could go without saying, but if there is a lesson to be learned from everything that is going on in Washington, this is the one. By practicing the discipline of living off of less than what you make, you are preparing for what may happen if there is an unexpected loss of income, or some other unexpected event that forces you to live on less.
Start by scaling back on some of your nonessential expenses. For example, if you regularly go out to eat, start eating at home more often. If you frequently purchase apps on your electronic devices or take in movies, set a limit on how much you will spend each month that is below what you normally would spend. Take these and other austere measures so that you are prepared for any changes to your lifestyle.
Diversify Your Investments
If the federal government gets to the point where the value of the dollar begins to decline, you will want to have some investments in your total portfolio that hedge against this possibility. Two potential strategies for this include currency diversification and diversification into assets like real estate and commodities.
You could run out and buy real estate, gold coins, and foreign currency directly as a way of physically owning these assets, but there are much easier ways to invest in these. For example, there are mutual and exchange-traded funds that specialize in these asset types. The benefits of using these instruments typically include greater diversification, professional management, and lower expenses.
In 2013, there are a number of tax increases and spending cuts that are scheduled to kick in, including cuts to unemployment benefits. Don’t be left holding the short end of the stick. Let us hope for the best, but prepare for the worse.