With the White House and congressional leaders divided over raising the debt ceiling, the U.S. could run out of money to pay its bills as soon as June 1.
If lawmakers fail to raise the debt limit, the economic impacts could be wide-ranging, affecting everything from interest rates to the stock market
While consumers may be nervous about the potential implications, there are some steps they can take to safeguard their finances. “I think the biggest thing is reviewing your entire financial situation, always remembering that you should focus on what you can control,” said Dominique Broadway, a personal finance expert and founder of Finances Demystified.
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If the government fails to raise the debt ceiling, that does not necessarily equal default, according to Jamie Cox, managing partner at Harris Financial Group. While the government would not be able to borrow additional money beyond the debt limit to meet its obligations, there would still be revenue coming in.
“The chances of the U.S. defaulting are very low,” he said. “That doesn’t mean there wouldn’t be economic consequences, or real consequences to individuals if the government doesn’t authorize the debt limit to be increased.”
Cox said the government would prioritize payment of its bonds and preserve the integrity of the U.S. Treasury, but may not authorize other payments from programs Americans rely on, such as Supplemental Security Income or food stamps. “So, the economic impact would be far and wide reaching and would definitely reach those individuals least able to afford it,” he said.
By taking money away from those who rely on government services, consumption would fall, resulting in an economic downturn that could impact stocks and 401(k)s, Cox said. Salary payments for federal employees could also come to a halt, even if just for two or three weeks.
If the U.S. did default on its debt, the repercussions would only get more extreme. A default would disrupt global economies, devalue the U.S. dollar, trigger widespread unemployment and more. But it’s important to note, this has never happened.
Treasury Secretary Janet Yellen on Tuesday warned in remarks to the Independent Community Bankers a default could lead to “a downturn as severe as the Great Recession,” more than 8 million Americans losing their jobs, and the value of the stock market plunging about 45%, “wiping out years of retirement and other household savings.”
Consumers could also expect interest rates to go up, Broadway said. If they have an adjustable-rate mortgage, for example, they could see those rates jump substantially, which would cause their payment to increase.
“And that could essentially lead to more people defaulting on their car loans, mortgages, you know, things that we pay interest on,” Broadway said.
What can you do to protect your finances amid the debt ceiling fight?
Cox said recipients of cash payments from the government could take steps like buying extra groceries to tide them over. However, they would likely only need a month’s worth of additional food at the most, as he said the pressure on Congress and the president to act would be “immense.”
When it comes to the market, Broadway said, “I don’t think it’s a smart idea to run and hide your investments.” However, if someone has money invested that they need to use in the next few months, she said it might be worth taking some of it out.
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“You may want to take it out a little bit sooner to prevent a potential 40% to 50% decline in your assets that you have in the market,” she said.
Cox noted that investors could also wait and see what happens, “because that gives you an option to not try to predict what the market is going to do, but actually react to what the market actually does.”
Those whose jobs may be impacted may want to set aside some cash just in case. “You might need a little bit of money on the side to cover you for a period of time, maybe a month to six weeks, until the matter is resolved,” said Cox. Once the debt ceiling is raised, he said, payments that were due would be made.
Broadway added that it might be a good time to switch debts with adjustable rates to something fixed. For instance, they could convert their adjustable-rate mortgage to something with a set rate, or swap a credit card for one that has a set amount of interest for a certain length of time.
Regardless, try not to get caught up in worst-case scenarios. “You shouldn’t be up at night like, ‘Oh, my God, the U.S. is going to default, that means we’re all defaulting, we’re all going to be broke,” she said. “That’s not the case.”
Nathan Diller is a consumer travel reporter for USA TODAY based in Nashville. You can reach him at [email protected].
