On Tuesday, Jan. 15, 2013, Fitch Ratings warned that if there is another Debt Ceiling Crisis, they could lower the U.S. credit rating.
The U.S. is already in a crisis. Treasury Secretary Timothy Geithner has been using "extraordinary measures" to pay bills since the $16 trillion debt ceiling was hit on Dec. 31, 2012. And, even if Congress lifts the ceiling quickly, the U.S. could still face a downgrade before the end of the year. So, it's vital to learn how to protect your assets now.
11 Ways to Protect Your Future from Another Credit Downgrade
1.Don't Cash Out Your Retirement Plan.
2.Protect Your Assets.
3.Diversify.
4.How Safe Are Annuities?
5.Reduce Your Taxes.
6.The Thrive Budget. (Get Spending Under Control)
7.Reduce Debt.
8.Hard Assets.
9.Lock in a Fixed Rate.
10.Reduce Your Energy Costs.
11.Consider a Health Savings Account
And here is more information...
1.Don't Cash Out Your Retirement Plan.
If you cash out your 401K or IRA, the
penalties and taxes could slice your nest egg in half. Additionally, your retirement account offers tax and financial predator protection. (This is money that is yours to keep, no matter what.)
2.Protect Your Assets.
Over the short term, the easiest way to have greater protection is to make sure that you have a percentage equal to your age (at minimum) in Treasury bills and high quality bonds, plus 10 to 20 percent additional based upon market conditions. Hard assets perform better during inflationary times than paper assets, and there is both credit and interest rate risk in bonds, so don't go all in.
3.Diversify.
Diversify everything -- including your safe and at-risk liquid investments, and even your hard assets. Access pie charts that incorporate Modern Portfolio Theory diversification strategies in my new book, The ABCs of Money.
4.How Safe Are Annuities?
Annuities are not FDIC-insured. If we had not bailed out AIG in 2008, more than 50 million annuities would have imploded. The State Insurance Guaranty Funds could not have handled the load. Before you rely on the safety of an annuity, it's important to read the fine print, and do a fiscal health checkup, of your own, on the company that is promising to provide for your future.
5.Reduce Your Taxes.
Your retirement plan and owning your own home are two of the easiest ways to protect yourself from rising taxes in the U.S. Your retirement plan can be pre-tax or offer tax deductions, and the gains grow without capital gains taxes. Your home mortgage interest is also tax deductible. So, if you are not doing these two key strategies, you are just giving more to Uncle Sam. Get on the Mitt Romney, pay only 14 percent, tax plan!
6.The Thrive Budget. (50 percent to survive and 50 percent to thrive.)
Nothing will reduce debt faster and transform you out of struggling to survive and buried alive in bills into the life of your dreams than adopting the Thrive Budget. The basic premise is that by reducing your basic needs expenditures to 50 percent of your income, you have 50 percent left over to enjoy life and invest in things that bring a great return, like passive income, charitable giving, fun (which is good for your health) and education (which increases your ability to earn income).
7.Reduce Your Debt.
If you want to reduce your debt, there are three things that have to happen. You have to increase your income, decrease your expenses and restructure the amount that you owe. Since making payments on time amounts to only 30 percent of the FICO score criteria, if this is your only plan, you could be increasing your indebtedness, lowering your credit rating, and digging yourself deeper into a hole.
8.Hard Assets.
In many parts of the United States, it is now cheaper to own a home than it is to rent. However, since credit is tight and credit worthiness is low, many people are forced to rent. If you have a lot of cash on the sidelines, it's time to consider safe, income-producing hard assets, like income property.
9.Lock in a Fixed Rate.
Interest rates are at an all-time low. If you are in a position to lock in a fixed rate at 3.5 percent, do it now. If you are able to consolidate your debt into a low-fixed rate, then consider that. However, this should only be done after you have done a serious analysis of how you can increase your income and assets, reduce your spending, adopt a sustainable budget going forward and have determined that this approach will work over the long-term.
10.Reduce Your Energy Costs.
Gas and electricity are a huge piece of most budgets. Can you reduce your commute to work and lower your gas bill? Should you buy a more fuel-efficient car? Put solar panels on your home? Reduce your heating and cooling needs by better insulating your home? Many of these are also tax-deductible.
11. Consider a Health Savings Account.
If you are healthy and spending an arm and a leg on your health insurance, then you are making the insurance company rich at your own expense. In fact, you could purchase a high deductible plan, save money in your Health Savings Account to cover the deductible in the worst case scenario, take a tax write-off and invest the money in your Health Savings Account for a chance at even more gains. Learn more about Health Savings Accounts on the IRS.gov website. This is an option that could save most healthy people thousands of dollars each year.
With a $16 trillion debt, the U.S. has a long way to go before it is out of the woods, even if the Debt Ceiling is lifted. Sadly, most Americans are carrying too much debt, too. So, personal fiscal housecleaning is a big piece of the solution to protecting your assets from another debt downgrade. Financial literacy is as well. Otherwise, you could be vulnerable to another get-rich quick fix that turns sour, just as many Americans experienced a few years ago, when they thought real estate was the only thing worth investing in. Diversification, tax protection, financial predator proof protection, debt reduction, asset allocation, liquidity, asset protection and more are all keys to the rich life in 2013 and beyond. It might sound difficult, but it is easy as a pie-chart (and a few other graphs), once you learn the financial literacy that we all should have received in high school.