How to prepare for the fiscal cliff

Time is running out in Washington for the country to avoid the fiscal cliff. If that happens, 8 or 9 percent budget cuts would hit the majority of the federal government and could throw the country back into a recession.

So what do you do?

We talked with J. Christopher Boyd, a leader in the Financial Planning Association of Massachusetts and the founder and chief investment officer of Asset Management Resources, LLC. He is a contributor to Boston.com’s Managing Your Money blog and the host of a financial radio show on WXTK 95.1

First things first, he said, “Don’t lose your head. It’s most likely that there will be some legislation after the New Year that will discount some of the tax increases.”
But it is unclear how long it will take for that legislation to go into place.

So Boyd advises people to revisit their W-4 document.

“Most people that work are going to have an increase e in payroll tax,” he said. “Make sure you’re not paying too much.”

He said that capital gains rates and dividends will both see increased rates, so “consider where you hold which investments.”

If a deal is not reached and the economy heads back into a recession an estimated 3.4 million people are expected to lose their jobs. With that in mind, it is a good idea to build up your savings, Boyd said.

Lastly, “You’ve got to be attentive to what’s going on,” he said. “It could affect your whole financial plan.”

But even with the fear of another recession, Boyd said that going through your finances around the new year is a good practice to be in the habit of anyways.

“It’s a good time to take a fresh look at what’s coming next year,” he said.