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Sequestration. What does it mean for you
If this is your first time hearing the word "SEQUESTRATION", I'm shock you have internet access to read our newsletter. The word has been bounced around everywhere as of late and some have a clue of what it is and others may not so let's provide some background on the word "sequestration". Sequestration was originally a legal term referred generally to the act of valuable property being taken into custody by an agent of the court and locked away for safekeeping, usually to prevent the property from being disposed of or abused before a dispute over its ownership can be resolved. Now FAST-FORWARD, Congressional leaders use the word as a way to describe the amount of money equal to the difference between the cap set in the Budget Resolution and the amount actually appropriated is "sequestered" by the Treasury and not handed over to the agencies to which it was originally appropriated by Congress. Now that we have a SOMEWHAT better understanding of the word, let's review Q&A from clients:
How did this much talked about sequester end up on our front door step?
During the 2011 debt ceiling negotiations, Congressional leaders agreed to raise the 2011 debt ceiling in exchange for $1.2 trillion in spending cuts. If no deal was reached on where the $1.2 trillion in spending cuts would come from then an automatic, across the board cut of 10% will go into effect (SEQUESTRATION).
Okay, thanks for the information but give it to me straight, is this bad or good?
Given the current economic outlook (sluggish GDP, dismal personal income and saving levels, and declining job opportunities available in the market), it's just BAD TIMING in my view. Just like your household budget and millions of other families in American, there comes a time you have to STOP spending like you have it to spend and accumulating more debt than your bank account can withstand and start practicing some sort of frugality.
What's affected and what's not affected during the sequestration?
Affected programs include a few mandatory programs, like the unemployment trust fund and Medicare (more specifically its provider payments) are affected. The bulk of cuts come from discretionary spending for either defense or domestic functions. Programs Not Affected include mandatory programs, like Medicaid and Social Security, and in particular low-income programs like Temporary Assistance for Needy Families (TANF, or welfare) and the Supplemental Nutritional Assistance Program (SNAP, or food stamps) were exempt from the sequester. There are some low-income programs such as aid for Women, Infants, and Children (WIC) and the Low Income Home Energy Assistance Program (LIHEAP), that's subject to cuts. The agency that brunt's the most cuts is DEFENSE, with $42.7 billion being slashed from DoD out of the total $85.4 billion sequester cuts in 2013 (info via CBO or Congressional Budget Office).
So tell me why the Democrats and Republicans just can't agree to disagree and do something about it?
It's POLITICS, plain and simple. One side wants to raise taxes + One side doesn't want to raise taxes = STALEMATE. After all the dust settles, I believe there could've been a better way of dealing with sequestration besides furloughing workers and cutting funding for private contractors which will likely result in layoffs than the economy was anticipating and higher unemployment (which is a double whammy considering the fact there's possible cuts to take place for unemployment benefits in the sequester). Case in point, there's an estimated $261 billion in Federal government waste, fraud and abuse of the American taxpayers dollars in 2012 alone (via the House Committee on Oversight and Government Reform "GAO"), couldn't we focus on slashing approximately $95 billion annually (or 36% of the total waste, fraud and abuse amount) to assist with this sequestration...
What to do now that sequester is here? Some suggestions:
- Civilian Government Worker Facing Furlough: Reduce overall expenses (from current cable package to a basic one and the same for the internet provider as well as other monthly bills that can be reduced to a least expensive package), cancel subscriptions, be a do-it-yourself-er on small maintenance jobs around the home you typically pay a professional to do, more shopping at dollar store chains and less at high end retailers, review auto insurance policies to make sure there's not a better deal out there for you and MOST IMPORTANTLY, STAY ON BUDGET and build up a cash reserve now rather than later if possibly. Furlough today doesn't mean layoffs tomorrow.
- Private Government Contractor Facing Layoff: In conjunction of the above for the civilian government worker, I suggest canceling anything you can LIVE without (review your most recent bank and credit card statements to research what these services may be), reach out to each company you owe something to (debts) and inform them you're being laid off and need some assistance (i.e. forbearance's, rate reduction, new payment plan, extension on current debts due). Within an ordinary environment, you would not only qualify for unemployment benefits but you would also receive it during your time of no employment...PLEASE don't count on this benefit being available for you...as mentioned earlier in the newsletter, unemployment benefits will be a part of the sequestration as well. If your financial situation deteriorates more than expected and the savings have vanished coupled with a less than attractive job outlook, look to withdraw what's needed to survive for the next 3 months from your 401-K, TSP or other retirement accounts, while this will results in an early withdraw penalty of 10%, making ends meet for yourself and the family comes FIRST. Be wise with the distributions and think though the tax consequences before doing so (consult a financial/tax advisor first).
There's no better time than now to review your overall financial plan to see what you can do to void off your own sequester by coming up with a Plan A, B, and C (have a backup, on top of a backup, on top of another backup). If you or someone you know is facing financial issues, don't hesitate to reach out to us before the situation gets worse!
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