Lawmakers have yet to come to an agreement on the looming fiscal cliff, and many Americans have drastically reduced their spending in anticipation of a worst-case scenario. The fiscal cliff refers to a string of potential tax rate hikes and cuts to deductions and credits that many middle- and low-income people rely upon to lower their tax bills.
According to a survey conducted by Bankrate.com, nearly one in three Americans said they have made changes to their money management habits, and will continue to live more frugally until a tax agreement has been reached. In addition to slashed spending, Bankrate’s Financial Security Index to a low of 95.6 in December. Readings below 100 indicate slacking confidence in consumers’ financial security, and is largely driven by both personal and economic factors.
The decline in the index marks the second consecutive drop in all five components of the study – job security, savings, debt, net worth and overall financial situation.
“The risks of going over the fiscal cliff are beginning to resonate with consumers much the way they have with businesses that have held back in recent months,” said Greg McBride, Bankrate.com’s senior financial analyst. “The combination of tax hikes and significant spending cuts would push the economy into recession, and one-third of consumers are already beginning to cut back on spending due to the looming uncertainty.”
Low-income families make the most drastic cuts to income
The study broke the results down by demographic, and found that lower income households – those making $30,000 or less annually – and those without more than a high school diploma were cutting back the most. In terms of age, adults 65 and older were the most likely to cut back on spending due to fiscal cliff fears, while those under 30 were the least likely to reduce their spending.
Consumers who are concerned about the potential tax changes may benefit from bolstering their savings account and steering clear of taking on new debt. For example, maxing out contributions to retirement plans may be one action they can take to both increase their financial security in the future and lower their tax liability in the coming year.