Congress proved something on August 1, 2011 –- the American people are resilient, but we’ll only take so much inaction. Most of us, whether Republican, Democrat or indifferent, were fed up with our government leaders by the time the first of August even rolled around. After weeks of infighting between the parties, Congress finally passed a lopsided debt reduction bill that also raised the debt ceiling. Here, we’ll take about how this debt deal affects you.
The final plan, voted on in the Senate and signed by the President on August 2nd, adds more than $2 trillion in spending cuts over the next decade. It also raises the debt ceiling (the amount of debt the government allows themselves to contribute) until at least 2012.
Nevertheless, just like all negotiations, no one got most of what they wanted. In fact, there may even be more disagreement, as the deal requires that a new joint committee of six Republicans and six Democrats meet to decide on another $1.5 trillion in cuts by Thanksgiving.
So here’s where it gets personal. It’s likely that part of the cuts will include tax and entitlement reform. For Americans that make more than median-range income, that could mean more taxes and less benefits, since Social Security and Medicare are also on the table. While it’s expected that they won’t be cut completely, some sort of new formula for dealing with aging baby boomers is necessary. This directly affects a large number of personal investors who are nearing or have just settled into retirement.
What’s more, many liberal investors (such as myself) are wondering what they’ll get out of the debt deal. While most cuts will be delayed for a year to help soften the blow to the economy, the markets are already not responding well. The stock market took a huge tumble in the aftermath, with the Dow Jones dropping over 500 points. The outlook for the creation of new jobs doesn’t look too good either, with the number of people claiming unemployment benefits remaining flat in the days after the debt deal.
There isn’t much good news for the education sector either. Many folks in the finance and investment sector went back to school after the big crash, hoping to gain an advantage over the other thousands of people looking for jobs. While the deal does increase Pell Grant amounts, it does so at the expense of federal subsidized loans. Traditionally, these loans do not accrue interest while a student is in school. Now they will –- which could mean upwards of $10,000 extra in student loan debt for new graduates from Master’s and PhD programs.
Bottom line: Americans are getting a harsh reality check as the new debt deal goes into effect. Here are four tips to help you minimize its impact on your own life and on your finances:
1. Make sure your investments are secure. Consider investing in reliable and time-trusted Exchange Traded Funds (ETFs) and mutual funds, especially those in the large cap sector, which tend to be reliable and can often weather storms.
2. If you or your children are in school, look for alternative funding sources. There are dozens of scholarship websites on the web that link students with public and private fund sources and grant opportunities. Avoid taking out loans if at all possible, as you may be paying them down for a long time if you do.
3. Let your government representatives know how the debt deal affects you as an investor. The bill might have already become law, but your voice can still be heard! There’s hope to minimize the tax impact and loosen the strain on the markets if our leaders hear first-hand from personal investors like us.
4. Don’t let the partisan politics in Washington distract you from your ultimate goal: growing your own portfolio. With strong and diversified assets, you may not even need Social Security or Medicare when you retire. Free yourself from the worry and stress that come along with relying on government funding. Do yourself a favor and keep an eye on those long-term investments, like IRAs and 401(k)s.
This is hardly the last news you’ll hear about the debt deal. The markets may not bounce back for quite some time, but I thoroughly believe that they eventually will, and persistence in managing your portfolio will be key. Politicians, on the other hand, will start turning their attention to jobs and unemployment numbers. And while the threat of Standard & Poor’s downgrading the U.S. credit rating is very real, investors should use this time as an opportunity to tie up loose financial ends and to come up with portfolios that are stronger, sturdier and more diversified.
Created May 4, 2008. Updated August 12, 2011. Copyright © 2011 The Digerati Life. All Rights Reserved.