The much talked about and dreaded US fiscal cliff ended with a tax deal and without causing much damage to the financial system. There are sighs of relief all around that the US economy is on the right course to a full recovery. This doesn’t mean you should be complacent about your own personal finances, however. For many Americans, times are still tough and the chances of being laid off or becoming bankrupt are still high. But the recent economic crisis has taught us all one thing and that is to be adequately prepared for the future.
As a general rule, we Americans tend to think ‘big’ always – like big car, big house, big apartment, big wedding and practically ‘big’ everything. In good times, thinking big is good for business, which ultimately comes handsomely back to you. However, when the national economy and your own finances begin to go down the drain, thinking ‘big’ usually lands you in a financial pit that will take you years to climb out of – possibly never.
The point is you have to be prepared for all kinds of eventualities even if the going is good for you at the moment and there is a big wad of cash in your bank account. Here are some tips on how to avoid your own personal financial cliff.
Stash away some money for emergency use: This should probably be your rule number one for financial prudence. No matter how little you can spare after your monthly expenses, stash away some for the rainy days. You may have to deny yourself some of your favorite things, but that’s a lot better than having no money when you need it the most. Don’t be too concerned with the extremely low interest rate that your bank gives you; just keep this money liquid and accessible so that you can have it if you need it at a moments notice.
Nurture a healthy spending manner: For many of us, our spending habits are our biggest enemies. When you have a lot of cash, you can afford to spend extravagantly, live big and dream big. It’s when the money begins to dry up that you will start to feel the pinch. But once a bad habit is formed, it’s tough to give it up. So nurture a healthy spending manner before things get out of hand. Do not spend more than necessary even if you have a fat bank account and live within your means.
Fight off your personal weakness for things: Everyone has a weakness for expensive things such as electronic gadgets, culinary delicacies, and top of the line clothes and cosmetics. Many people foolishly max out their credit cards on things they can do without only to rue it the day they are hauled to the court for non-payment. If you can afford to finance your weaknesses, then that’s fine as long as you are careful not to go overboard with it. But if you cannot, then never make the mistake of financing it with a loan or from your saving.
Protect yourself with insurance: The future is always uncertain and you never know where or in what situation you will end up in the future. You must have read of former six-figure-salary-earners who are broke and homeless now. These people forgot to protect themselves when the going was good. One of the ways to protect yourself from falling into such hard times is to insure yourself. Research the market and purchase the right coverage, including disability, property, casualty and long-term care. Purchase a life insurance to protect your family (especially children) in case of your accidental death.
Set aside some funds for retirement: In Australia, they have a retirement fund called superannuation fund where it is compulsory for every adult to set aside some money for retirement and an equal amount is contributed by the federal government. Sadly, we do not have such a schemein the USA. Still, there is the 401(k), individual IRA and other retirement plans that are almost as good. Setting aside some money in one of these funds does not only ensure money when you retire, but also reduces your tax liability now. Another benefit is that investing the money from your retirement fund makes you exempt from capital gains taxes.Thus, you have only gains to make by putting money in your retirement fund.
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