What Is The Fiscal Cliff And Why Should You Be Concerned About It?

With the government shutdown and the debt ceiling issues, it all seems like there is a looming financial crisis in the horizon. But even as you try to come into grips with these news, you cannot help but wonder how it will affect your personal wallet. While the government haggles back and forth, you need to take time to understand a few important concepts that may or may not plunge us into another financial crisis.

A personal financial crisis is one thing. While it can be scary too, you can always rely on the government for aid. But what if it is the government that is having trouble? Where will we get financial help?

What is the fiscal cliff?

Just like the debt ceiling, the fiscal cliff is a term that strikes fear in the hearts of consumers. This is defined by Investopedia.com as the elimination of some tax cuts and decrease in spending at a pre-determined date. Here is a video from the Economist with an explanation of the fiscal cliff back during the end of 2012.

When people started to incur a lot of debts and go under, the government stepped in to propose special tax cuts to the credit industry. This is to encourage them to allow consumers to get debt reduction. In the simplest term, the government provided tax benefits to credit companies for any debt they forgive. It involves a lot more than just these credit implications. The government also hiked consumer benefits and protection. All of these were intended to help consumers and their respective households to rise above their own financial struggles.

But while that helped us, it meant an increase in government spending that resulted in a higher deficit for them. They spent a lot more than what they were getting in terms of taxes. As the government debt continued to increase, they get closer to the debt ceiling.

That is the whole purpose of the fiscal cliff. It seeks to eliminate:

• Tax benefits and exemptions that lowered government income, and;

• Consumer and business benefits that increased government spending.

By eliminating these two, the government will be able to prevent defaulting on their own debts. This was back in 2012. As you all know, the fiscal cliff then was averted on the first month of 2013 as the President and the House/Senate agreed to postpone this event from happening.

But it seems that we may be heading for another fiscal cliff as the government shutdown and debt ceiling raised new problems for the country. Will the government finally go over the fiscal cliff or will they postpone it once more to give everyone more time to solidify their respective finances?

While the fiscal cliff will help the government reduce their own deficit, what will it mean for the average American?

Effects of having the government withdraw tax cuts and make spending cuts

As mentioned, the fiscal cliff will result in higher taxes and lower benefits for the average consumer. Instead of helping us, the government will be holding back the assistance they used to give us so they can take care of their own problems. It is difficult to judge if this is the logical way of handling the overall financial problem of the country. But nevertheless, these are the possible effects that you can experience when the government decides to just go over the fiscal cliff.

• It can increase your income tax. The increase will vary depending on where you fall in terms of the income bracket. Most likely, the more you earn, the more will be taken from you in terms of taxes.

• Federal unemployment benefits may be affected – which means it could be lowered significantly.

• Credit companies may be less than willing to accept debt reductions and forgiveness of consumer and business debts.

• Loans and other types of credit may be given higher interest rates to help creditors offset any losses that used to be backed up by the government.

• It can affect small businesses and hinder the growth of their profits.

These are only some of the few effects of the fiscal cliff. The specific details will all depend on what the President, House, and Senate will come to terms with. But in the meantime, what can you do?

While you should be keeping an eye on what is happening to the government’s financial state, you have to start looking towards your own finances. You need to start looking for ways to cut your monthly bills. If you have plans to buy something expensive, postpone that for now – especially if you plan to purchase it on credit.

You should also boost your savings even further. Even if you have already completed your emergency fund target, why not add more to it? That way, in case a financial crisis does happen, you don’t have to worry about your daily expenses.

There is nothing that we can really do right now but wait for our chosen legislators to settle their differences and arrive at a solution that is beneficial for everyone. At the rate they are going, it is difficult to know if they will arrive at an agreement quickly or it will be dragged out. Regardless of what happens, just make sure that your own financial standing is secure.