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This Week’s Newsletter: Debt Ceiling and Same-Sex Marriage

walletI’m throwing up the newsletter I sent out yesterday as a freebee – well, it’s always free (of course!) but usually I don’t share it on the blog. Instead, you have to subscribe to receive my weekly musings about the latest news headlines and what they mean for your wallet (and your life).

I hope you’ll subscribe here, so next week’s version will go straight to your inbox.  You’ll continue to get it every Tuesday thereafter.  And this goes without saying, but I won’t share or use that address for anything else – promise.

Here’s what you missed yesterday:

This Week In Your Wallet: July 26, 2011

So let me just say, I am as frustrated with Washington as I know every one of you are. With such a short timetable in play – and the story dominating pretty much every news outlet – you don’t need political analysis from me. But I thought it made sense to spend a few minutes talking about the what-ifs where your money is concerned.

First though – and you can skip this paragraph if you’re fully up on the issue – a brief explanation of the debt ceiling and why it matters. As Daily Finance nicely noted here, “Like every other country on Earth, America borrows money to pay for its services. But legally, there’s a limit to how much money the federal government can borrow…Every time we’ve bumped up against that ceiling in the past, the legislative branch has simply increased the nation’s credit limit…This time: There’s debate.” The problem, as the story continues, is that if they don’t raise the ceiling, they have to come up with the money they would have borrowed elsewhere (thus, the talk of spending cuts and tax hikes) or stop paying (thus, defaulting on the debt or giving short-shrift to other government payments like military salaries, food stamps, Medicare/Medicaid, etc.) That’s where we are today.

What if the ratings agencies downgrade US debt? This, it’s important to note, could happen even if the government reaches an agreement on the debt ceiling in time. And, particularly for investors in treasuries and other fixed-income securities (and more investors are playing in these waters than ever before), this is a big deal. Up until now, US Treasuries – which carry AAA ratings – have been considered the safest of the safe. In the event of a downgrade the bond market would sell off. So would the stock market. Even money market funds (which hold Treasuries) aren’t immune. And our currency would very likely take a hit. Because US Treasuries are tied to US dollars, anything that caused a drop in the value of the former would likely cause the dollar to depreciate.

What if the US actually defaults? Then, the US will have to pay higher rates of interest in order to get investors interested in our government debt. Right now, as Treasury investors know, we don’t have to pay much in interest at all on government debt precisely because it is considered so safe. But as the bonds become riskier, no one – not investors here, not investors in other countries – will be willing to hold them unless the reward on the other side makes that worthwhile. The effects of that will be felt in just about every facet of your wallet. Borrowing to buy a house, a car, an education will become more expensive because the interest rate on that debt is tied to bond rates. If the dollar depreciates, anything that is produced overseas (from foreign oil to electronics to apparel) gets costlier too.

And there’s a major trickle down effect. From Daily Finance: “All the parts of our economy are intricately intertwined, like a woven basket where each reed relies upon the next for support. Say the government postpones payments to a contractor. That contractor may decide to hold off on that new ad campaign it had planned to launch. Now, people working in the advertising industry, and maybe the newspapers and television channels that rely on advertising dollars, start to feel the pinch, and so those people decide to start saving more and spending less, in case the economy takes a downturn. Because consumers are now spending less money, stores start seeing a decrease in sales, and respond by reducing employees’ hours or even engaging in outright layoffs. And it spirals downward from there.”

What if an agreement is reached? Although the markets have been relatively calm (at least compared with the roller coaster some experts predicted) there is certainly some fear in the waters. A short-term agreement (of the sort the President has said is unacceptable) won’t likely do much to mollify those fears – particularly if the ratings agencies don’t like it. But if the government reaches a long-term agreement by the deadline, the bond market may rally as a result.

But for now we wait. And we worry. At this time next week we will know – and if the markets are to be believed, it will all have worked out if not for the better, then at least okay.

The Financial Implications of Tying The Knot

I live, as many of you know, in New York, where hundreds of same-sex couples tied the knot over the weekend. On the heels of the long overdue change in the law, I thought I’d take a look at the financial implications of both same-sex marriage – and (thanks to a new study) staying single. Marriage first. Same-sex couples who marry don’t get the same cadre of rights and benefits that heterosexual couples do. Here, the differences and the moves you need to make in response:

Difference: Same-sex couples can’t file joint tax federal returns, but they can file joint state returns.
Financial move: Visit an accountant familiar with the tax issues of same-sex couples. It may or may not be worth filing a joint state return (the administrative hassles are high) but working woth someone who has been through the process before is key.

Difference: Same-sex couples don’t have a right to their spouse’s Social Security benefits.
Financial move: Saving even more for retirement will likely be in order. Go to choosetosave.org (if you haven’t already) and figure out if you’re on track in terms of your retirement planning/saving/investing. If not, starting to save more now (rather than years down the road) is absolutely necessary.

Difference: Same-sex couples can’t pass assets to the surviving spouse without the threat of estate taxes.
Financial move: Right now the unified tax credit allows any person to pass along $5 million in assets without having to pay estate taxes – which means taxes aren’t the main issue for most people (if they are an issue for you, talk with an estate planning attorney about the menu of trusts that can enable you to pass along more in value by gifting earlier rather than later). Making sure that your belongings/assets pass as you wish them to is. And for that, you need a will. You also need to double check your named beneficiaries on your investments and insurance policies so that your spouse is your inheritor. Finally, you need durable powers of attorney that gives your spouse (or someone else of your choosing) the ability to make financial and health-related decisions on your behalf.

And The Financial Implications of, Well, Not Tying It

A new study from EBRI, the Employee Benefits Research Institute, found that although 80 percent of married folks will have enough money for retirement, only 55 percent of single folks will. Why? In part, it’s that married folks will more frequently have two retirement accounts and that (at least those in heterosexual marriages) will benefit from each others’ Social Security checks. But it’s also that married folks have someone to nudge them along. So that when a spender marries a saver (as financial psychologists have told me tends to happen) the latter pushes the former onto the right road.

It’s not a small issue. Singles represent the fastest growing segment of the adult population in America. Here, courtesy of a recent blog post at SmartMoney, are three things singles should be doing:

Have a great week!
Jean