How 2010 Impacted Your Money

From tax cuts to health care legislation, consumers close the year feeling a little bit more optimistic.

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When it comes to your money, the last 12 months offered highs (recovering stock market) and lows (lingering unemployment). Here’s a guide to understanding how 2010 affected your bottom line—and how you can take advantage of some of the changes:

[In Pictures: 10 Kitchen Tools That Will Save You Money]

Taxes: Final word depends on Congress, but tax cut legislation is expected to pass. That means the Bush-era tax cuts will stay in effect for all income levels, even for Americans earning over $250,000 a year. The proposed bill also cuts Social Security payroll taxes by 2 percent next year. President Obama estimates that will save the average family about $1,000. In addition, the bill brings back the estate tax, which disappeared in 2010, so estates over $5 million will be taxed at a 35 percent rate.

What it means: You will pay less in taxes, which means more money in your bank account.

Health care legislation: Health care reform will affect people’s bank accounts in a variety of ways, many of which are not yet clear as the details continue to be worked out. But some changes are straightforward: Young adults still dependent on their parents can stay on their health insurance until age 26. Some common screening procedures, such as blood pressure or cholesterol checks, will no longer come with a co-pay in many cases. Some changes might mean paying more: Over-the-counter medicine such as Advil now require a doctor’s prescription before they are eligible for reimbursement under flex spending accounts.

What it means: If you’re a young adult, then you might be able to take advantage of your parents’ health insurance. If you’re eligible for screening procedures, then you’ll probably pay less for them. To take advantage of the changes, make sure you understand which ones apply to you. The White House Health Reform site offers an easy-to-use guide.

Income: The unemployment rate has been uncomfortably high all year long, with the Bureau of Labor Statistics reporting that it was 9.8 percent in November. Some workers, though, fared better than others: New research from the College Board paints a stark contrast between those who have college degrees and those who don’t. College graduates face a 4.6 percent unemployment rate compared to high school graduates’ 9.7 percent rate. They also earn far more: Bachelor degree holders over age 25 earn a median salary of $55,700. High school grads earn just $33,800.

What it means: College degrees help provide financial security during tough employment periods such as this one. Unemployment is still relatively high, making it a tough year for many Americans.

Spending: As this year’s more vibrant holiday shopping season illustrates, consumers feel comfortable spending again. But that doesn’t mean they’re spending frivolously. In fact, shoppers across all age groups are sticking within their budgets, comparison shopping, and using coupons. Younger groups are leading this trend: One in three members of Gen Y plan to spend less on each person to stay within their budgets, according to the Western Union Payments Money Mindset Index.

[For more money-saving tips, visit the U.S. News Alpha Consumer blog.]

What it means: If you’re following this trend, then you’re a savvier shopper than you were a year ago, and that’s a good thing for your bottom line.

Savings: The recent recession continues to inspire people to save more money for a rainy day, perhaps because we’ve experienced so many of them lately. According to the Bureau of Economic Analysis, Americans are now saving almost 6 percent of their disposable income. That’s about three times more than we saved back in 2007.

What it means: If you count yourself among the Americans who have ramped up their savings, then you’re on more solid financial ground than you were a year ago, which will make it easier to handle any rainy days ahead.

Credit and debt: The latest numbers from the Federal Reserve show that consumer credit card debt continues to decline; in October it decreased at an annual rate of 8.5 percent. That’s because consumers are cutting back on their debt and also because lenders are reducing the amount they lend to consumers.

What it means: If you have a weak credit report, then it’s relatively difficult to take out loans right now. While it’s frustrating to get denied a loan, the tighter standards are also forcing consumers to take on less debt that they can’t pay back, which might be a good thing in the long-run.

Investing: With the markets poised to close on a positive note, investors learned valuable lessons from the instability of the last couple years. The days of blindly trusting banks and financial advisors appear to be over. A new survey from TD Ameritrade underscores the money-smart trend: 41 percent of 20-somethings are monitoring the markets and their investments more heavily than before the recession.

What it means: As long as you’re asking tough questions and understand where your money is invested and what fees you’re paying, then you’re less vulnerable to fraud and over-paying for financial services than you were a year ago.

The bottom line: The recent financial challenges appear to have transformed the American consumer from a shopaholic into a more careful financial manager. New legislation is also expected to help boost people’s bank accounts, which means many Americans are closing out 2010 on stronger footing than they began it. That’s news we can all celebrate.

Kimberly Palmer is the author of the new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.