Monday, July 20, 2009

OK, the Federal Deficit Is More Than $1 TRILLION – So What?

Exactly a week ago today, the U.S. Treasury Department reported that nine months into the current fiscal year – with three more months to go – the American budget deficit is a little over $1 TRILLION! The exact the figure they gave was $1.086 TRILLION!

I will leave the obvious stuff like the how, the why, and the generic effects – possibility of rising interest rates, inflation, and a host of others – to the traditional news organizations and bloggers. As a matter of fact, here are a few for you: Yahoo News, Market Watch, Michelle Malkin, and the Huffington Post.

As is always the case here, I'd prefer to focus on the critical things that no one seems to echo, yet which directly affects your financial well-being. It's entirely probable that most people will shove off a story discussing the federal government’s budget deficit when they have their own deficits to deal with. Also in my opinion, most media outlets make the discussion so mundane that everyday folks simply feel removed from it.

For instance, a TV commentator or reporter might say something like, “The federal budget deficit is now over a trillion dollars. This is due to the fact that we are funding two wars and dealing with a recession. Some are concerned such a deficit could lead to rising interest rates and inflation, which will further weaken the dollar.” On hearing that, are you likely to stop to consider whether or how that has an impact on your day-to-day life? If you're like most people, probably not – and that's a completely understandable reaction.

Let me explain why such news is critical to your personal financial planning. But first, the really big deal is that this is the first trillion-dollar budget deficit in world history. It has never happened before, ever – until now. It’s like the first light bulb, plane flight, telephone conversation, or man on the moon.

So What?
Just like you and I, when Uncle Sam is in debt, interest has to paid in the short term at least, and then sooner or later, the principle will have to be paid down as well. Think about a 30-year mortgage loan with an interest-only feature. You can make the interest-only payments for up to, say, the first 5 or 10 years, after which you MUST start paying down the principle, in addition to the interest.

Uncle Sam has two – responsible – options for paying down this monstrous deficit:

(1) Reduce spending. (2) Increase taxes.

It would be extremely naïve to think that the federal government will realistically reduce spending by cutting programs like Social Security and Medicare or fulfilling campaign promises. Given the two alternatives, Uncle Sam will tax more, rather than spend less. This has nothing to do with politics; it’s just how government works. It should not surprise you that already there are tons of government proposals in the works aimed at raising tax revenue.

While You Still Can

Very shortly, it will be extremely difficult to find an expert (one who actually knows what they are doing) who believes that tax rates will do anything but increase. So get your money out of a taxable environment and into a tax-free environment, now! Like we do for our clients (and I’ve been telling people all along), build assets that you can access without creating what the IRS calls a taxable event. Because if your assets are not taxable, your tax rate is zero percent, meaning that when rates go up, they won’t affect you.

If that sounds odd to you, you have more than likely been following conventional financial advice. Or your financial advisor has successfully made you believe the LIE – that a Roth IRA is your best bet. Or you have been brainwashed into believing the myth that you’ll be in a lower tax bracket once you retire, so it’s a good idea to use qualified accounts like 401(k)s now.

Like I always say, I am not a fortune teller, so I do not have exact answers. You are free to choose to believe whoever and whatever you like about the future. But if someone were looking at the darkening skies, watching the zigzagging lightning streaks, and listening to the thunder rumble, and still concluded there was no possibility of rain, wouldn't you consider that person more than a bit naïve?
Call (301) 949-4449 today for your free consultation or visit Laser Financial Group on the web.

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