Will Spending Showdown Affect You?

Capitol in fog.

Only a few weeks after the year-end "fiscal cliff" showdown, the nation is already facing another high-stakes Washington debate -- and if you depend on the federal government for income, it's a debate you should be watching.

While it's difficult to predict exactly what will happen, we've turned to USAA's financial professionals for advice about how to help protect your family's finances from potential fallout.

Federal Spending in the Spotlight

The federal government faces three important spending-related deadlines during the first quarter.

First comes a decision about the debt ceiling, which is the total amount of money the federal government is authorized to borrow. Currently set at $16.394 trillion, the debt ceiling was actually reached Dec. 31, but the U.S. Treasury Department took steps to delay its immediate impact.

"There appears to be agreement in Congress to raise the debt limit, at least temporarily," says Dan Brouillette, senior vice president of government and industry relations at USAA. "If that sentiment holds, then the government will have some breathing room with regard to borrowing. There are still significant differences of opinion on the issue of government spending, however."

The other deadlines concern planned spending cuts and the government's authority to spend money. First, $110 billion in so-called "sequestration" spending cuts -- originally scheduled to kick in Jan. 1 but then put off in the "fiscal cliff" deal -- are set to take effect March 1. Then, on March 27, a continuing resolution that provides spending authority for government operations will expire.

"While the sequestration cuts aren't expected to have any effect on active-duty military pay, an impasse that prevents authorization of new government spending could prompt a federal government shutdown," Brouillette says.

What You Can Do To Be Prepared

In light of the uncertainty in Washington, Scott Halliwell, a certified financial planner at USAA, offers a four-step fiscal tightening process for those whose paycheck comes from the federal government. "Even though we don't yet know how things will work out," he says, "this is a great opportunity to tighten up your finances -- just in case."

1. Develop a budget. Start reducing your payments by setting up a budget and building an emergency fund. "Before you can cut back, you first need to have a good handle on where your money currently goes," Halliwell says. To free up cash, he suggests studying your budget and finding places to cut back on nonessentials now. "Expenses like premium cable channels and frequent dining out are 'wants,' not 'needs,' and are great sources for cash if you're trying to bulk up your reserves."

2. Stock up on cash. "Step one was all about finding places to cut back. Step two is about taking the fruit of that labor, the extra money, and saving it," Halliwell says. Allocate all the money you save to an emergency fund -- a conservative bank account you can tap easily. "If there is ever a chance your paycheck could get disrupted, your first line of defense is to have cash in the bank." As an additional layer of security, establish overdraft protection on your checking account if you don't already have it and research any related fees.

3. Don't spend (or borrow) if you don't have to. Occasional large expenses are just part of life, but now might not be the best time to incur them. "If you've got a large expense or big purchase on the horizon -- whether you're planning to pay cash or borrow the money -- hold off for now," Halliwell urges. "Keep your cash in the bank and your payments low until you see how things shake out."

4. Create some new income. Look for overtime work or a new part-time job for you or your spouse. Also, if you typically get a large income tax refund, consider adjusting your withholding to keep more of that money now.

"This is a good time to develop a plan to keep your finances on track if things get tight," Halliwell says. Plus, if the issues in Washington ultimately get resolved and your planning wasn't needed, you'll likely be better off for the effort.

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