Washington has done its job -- sort of. Now what financial moves
should you make in response?
deal to avoid the fiscal cliff
means that most Americans won't see a major tax increase, though it
put off dealing with important deficit-reduction issues. In
general, the solution is bullish for the economy in the short term,
though it leaves lingering credit concerns for the U.S.
In light of this, here are five post-cliff moves you should
1. Follow through with home-buying plans
The threat of the fiscal cliff left prospective home buyers in a
Mortgage rates were low
, but the fiscal cliff threatened to cause a spike in unemployment.
Nobody wants to buy a house when facing the prospect of
unemployment. With that immediate threat to the economy now
removed, it should clear the way for people with good jobs and good
credit to take advantage of the lowest mortgage rates on
2. Take a fresh look at refinancing
Today's mortgage rates have given millions of homeowners the chance
to refinance. However, circumstances sometimes block home owners
from refinancing, such as when property values have fallen below
remaining loan balances, or when credit ratings are poor. Time can
help cure both those problems, but the time for low mortgage rates
may be running out. The fiscal cliff solution could lead to higher
mortgage rates for two reasons.
First, by cancelling planned tax increases, it supports economic
growth, which tends to push interest rates up. Second, because the
solution did not address deficit reduction -- quite the opposite,
in fact -- it could raise borrowing costs for the U.S. government.
Moody's, a major bond rating agency, has clearly stated that
without deficit-reduction measures, the government's bond rating
could suffer. That could push up interest rates across the
3. Shorten your CD terms
If the possibility of higher interest rates is now on the table,
you should avoid commitments to long-term CDs. Besides not wanting
to lock into what may be a low point for interest rates, you also
have less of an advantage to gain by opting for a longer CD these
days. Three years ago, interest rates on five-year CDs averaged
1.93 percent more than rates on savings accounts, according to the
FDIC. Now, five-year CDs pay just 0.77 more than savings account
4. Rebalance your portfolio
Another dilemma posed by the fiscal cliff involved
. Going over the cliff would have been bad for stocks, but good for
bonds. Now, the outlook for stocks is brighter, while you might
want to be wary of bonds at today's low yields. In any case, things
are now a little clearer than they were before the tax deal, so you
should review your asset allocation in that context.
5. Cut expenses by 2 percent
One temporary tax increase that was allowed to expire was the 2
percent reduction in the payroll tax, which goes to fund Social
Security. So, your paychecks will be 2 percent lighter than they
were before the end of 2012. A good way to respond to this is to
review your expenses to find savings equivalent to 2 percent of
many opportunities to do this
-- from making sure your tires are properly inflated for winter
driving (which improves gas mileage), to switching to a free
checking account, to getting new insurance quotes. Two percent is a
small enough amount that you really can get there by doing a series
of little things. The alternative is that the payroll tax increase
will reduce the amount of personal savings you have left over every
year, and most Americans are already saving a critically low
Unfortunately, Washington seems to prefer living
crisis-to-crisis rather than formulating long-term solutions.
However, the tax deal was significant enough to lend some insights
to your financial decisions -- at least as you wait for the next
crisis to develop.