All the media attention paid to the so-called “fiscal cliff” since the recent elections were decided suggests that this doomsday economic scenario is something new under the sun.
The reality is that this situation has been brewing for a long time, and the “cliff” we are about to go over is our inevitable destination after decades of government over-spending on various goodies that our society simply decided to pay for with credit.
Another sad reality is that many individual households have experienced their own version of the fiscal cliff through the ages, but it is called something else —bankruptcy. As we move into a new year, a good first step for our financial health is to survey the terrain of our household finances to make sure we’re not in danger of going over the edge. Here are a few things to look for:
• Debt. Is the total amount we owe in line with our income? Signs of excessive debt include payments consuming over half of take-home pay, making only minimum payments on charge card accounts or delinquent payments.
• Lack of reserve funds. Unless a recent financial emergency has eaten away at your savings account, having little to no cushion in reserve cash results from a failure to set aside funds on a regular basis. This causes us to take on debt when unexpected expenses come up, and we end up in an endless debt cycle.
• 401(k). Are we putting enough away to replace an adequate portion of our pre-retirement earnings when you decide to quit working? At a minimum, make sure you are contributing the amount needed to capture the full employer matching contribution under your plan’s formula. If you don’t know what this amount is, call your HR department for help.
• Insurance. How will your family replace your income if you die unexpectedly or become disabled and can’t work for an extended period?
• Taxes. Too many people fail to withhold or set aside the right amount for income taxes; some underpay and are left scrambling to find funds to pay Uncle Sam by April 15 while others pay in too much and end up waiting for Uncle Sam to send them a big refund. It’s better to set up “forced savings” into a savings or investment account. Have your CPA review your tax withholding to make sure it is set at an appropriate level.
There are other areas to evaluate and disciplines to develop to set us on a good financial path and keep us on course over time.
A qualified financial planner can help get you started by taking the guesswork out of putting together the various pieces of your financial puzzle. ‘Tis the season for New Year’s resolutions — why not start with a financial checkup?
Steve Conard is a Certified Financial Planner™ professional with Compass Financial Services, a registered investment advisor with offices in West Des Moines and Adel. Securities offered through LPL Financial, member FINRA/SIPC.