Spending, mounting debt cause personal ‘fiscal cliff’

The Bakersfield Californian
December 12, 2012

A client walked into my office last week. He was all in a fizz over the fiscal cliff Congress and the White House threatened to throw the country over.

He was correct to be concerned that a potential impasse in Washington over the nation’s debt, tax rates and spending could lead to a deep recession in 2013. The debate, alone, has chilled some business decisions and caused a bit of an economic slowdown.

A salaried employee approaching retirement age, my client is just now recovering from the catastrophic hits delivered to his company’s 401k tax exempt retirement savings plan by the Great Recession of 2008-09. But a robust stock market and the nation’s slow economic recovery has restored many of the losses.

Money in his 401k plan, the investments he has made through my company and his Social Security checks will be his primary sources of income when he retires. Frankly, at this point, he has not saved enough.

The Great Recession was not my client’s only obstacle to having a financially secure retirement. He has not made saving for retirement a “priority.” He borrowed to pay for two of his daughters’ recent weddings that cost a combined total of about $60,000. And, he and his wife like to buy “toys” – a motor home and two new vehicles are among their recent purchases. The new house they bought at the peak of the real estate frenzy is financially “under water.”

So when he came into my office fuming about Washington’s “revenue” and “spending” problems, my response was quick. Unless he gets serious in 2013 about reducing his debt and increasing the revenues he invests in his retirement plan, he’s headed for his own fiscal cliff. It’s time for him to spend less and save more. His resolution for 2013 must be: Reduce debt.

  • Obtain a credit report to provide a “base line” to measure his progress.
  • To reduce his debt, he needs “extra money.” That means reducing his expenses so he will have money to pay down his loans, including credit card balances, at an accelerated rate.
  • Pay cash, rather than use credit cards.
  • Trade “free time” for moonlighting. He has long turned down opportunities to “freelance” his job skills.
  • Create a budget to identify his family’s expenses and opportunities to save money. Eliminate redundant services. Embrace personal sacrifice. For example, he could mow his own lawn, rather than pay a gardener $100 a month.
  • Allocate “extra money” to paying off specific debts. That requires prioritizing. Commonly, it is advised to pay off loans with the highest interest rates first. Consult with a financial advisor to determine if obtaining a “consolidation loan” will help.
  • Create a “rainy day” savings fund to prevent a day-to-day “crisis” from becoming another reason for going deeper into debt.
  • Increase contributions to his 401k plan and other retirement investments. He has a long way to go before he has enough saved to provide a financially secure retirement.