It's hard to turn on the television or pick up the paper without hearing how the debt ceiling deal, recently passed by the U.S. House and Senate, will keep the country out of default and reduce the federal deficit by at least $2.1 trillion over a decade. That's not the only thing the deal will do. It has the potential to impact everything from Social Security payments to individual investments.
To understand the ramifications, it's important to first understand the debt crisis and what got us into this mess. Long story short, America has been financially irresponsible. We have broken some of the most simplistic rules of financial stability: spend less than you make, save for a rainy day and only go into debt for a few, one-time expenses.
When the U.S. Department of the Treasury breaks these rules and doesn't have enough revenue to pay for federal spending, it issues debt to pay the deficit. There is, of course, a limit on how much can be borrowed--that is the debt ceiling.
Since the economy tanked and the stock market endured recent falls of a magnitude not seen since the global financial crisis of 2007 to 2008, the United States has gone even deeper into debt and increased the ceiling. After much back and forth on both sides of the Congressional aisle, a compromise was reached July 31, which contributed to more financial instability.
While the bickering has largely revolved around the beltway, the deal has ramifications that could affect all Americans. The four most immediate concerns are a person's available, spendable income; health-care costs; graduate and professional student loans; and retirement planning. How should individuals react? For starters:
• Diversify, diversify, diversify. Anyone investing in his or her retirement needs to be diversifying well with international holdings. This also includes diversifying sources of income.
• Assume and plan for the possibility that everyone will be responsible for his or her total health-care costs.
• Understand any outstanding student loans. There are two sections in the debt ceiling deal that affect graduate and professional students (undergraduates are not affected). It is important for those affected to understand these sections.
• Do not rely on Social Security or Medicare. Medicare is in immediate danger. Individuals must save for their own retirement.
At this point, the damage has been done. It is important to hold the government accountable for correcting the country's financial condition. With proper resolution, we can survive this crisis and perhaps help other countries survive as well.
Plan, But Don't Panic
While it is wise to be prepared, it is also important not to overreact. The best piece of advice is: Do not panic. Now is the time to become active in your own financial security. Seek professional advice, but choose advisors carefully. An advisor or organization should be evaluated not only on performance but also on character, commitment, conviction, courtesy and courage.
There once was a man who sold sandwiches at a roadside stand. The man was illiterate, hard of hearing and nearly blind. This prevented him from reading the news, listening to the radio or watching television.
However, despite the man's disabilities, he was smart. He offered attractive deals to increase his sales, which resulted in higher profits. He invested back in his business. He ordered more raw materials, recruited supporting staff and bought a bigger and better stove.
Then one day, the man's son visited from college. He asked his father, "Dad, aren't you aware of the great recession that is coming our way?"
"No," he replied. "I can't see the newspaper. I can't hear the radio. Tell me about this crisis."
"Well," said the son, "The international situation is terrible and the domestic situation is even worse. We should be preparing for the coming bad times."
The man thought that since his son had been to college, read the papers, listened to the radio and watched TV, he ought to know what's best. The man panicked. He stopped spending money as he had before. He cut down his raw material order, stopped offering special deals and reduced his staff. Very soon, fewer and fewer people stopped at his stand. His sales decreased rapidly.
The father said to his son, "Son, you were right. We are in the middle of a recession and crisis. I am glad you warned me ahead of time."
The moral of the story is this: Don't let panic affect your judgment. Individuals have the potential to fuel a recession much more than they think they do. Now is the time to become extremely active in the political process. Avoid apathy. Do not confuse intelligence with good judgment.
John E. Sestina is president of John E. Sestina and Company, a Columbus-based, fee-only financial planning firm. He can be reached at (614) 326-3077 or email@example.com.
Reprinted from the October 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.