Whenever there’s a new national budget, Congress seems to posture on both sides about what amount is and isn’t acceptable for our debt ceiling. The ceiling debate is a monetary limit of debt our federal government is allowed to carry. Once the limit is reached, the United States Treasury Department must either find new ways to pay its obligations to its creditors (typically foreign governments) or go into default. If the US’ debt goes into default, that lowers its credit rating and increases the cost of our debts owed.
Fortunately, the Senate approved a bill in October that temporarily raised the debt ceiling and stopped a government shutdown, which would have halted all federal government activities. Shutdowns affect everything the federal government touches from national parks to welfare benefits. Unfortunately, the ruling isn’t a permanent solution, so we aren’t in the clear just yet. The United States defaulting on its debt obligations has never happened before, so if you’re wondering what might happen with your own finances if it does, keep reading.
Here are three major factors that the debt ceiling debate could affect and what you should do to protect your finances.
Interest rates could increase
Lenders that rely on the U.S. Treasury to maintain their notes and pay yields will start to mitigate the risk of economic uncertainty by raising interest rates. This can affect everything from home mortgages and credit cards to private student loans. If you’re worried about your interest rates rising, you should focus on paying off your debts as quickly as possible. Try using the snowball method strategy to become debt-free quickly.
Despite an increase in interest rates, investing in assets that accrue value over time, such as education and real estate, may still be worth the cost. The value will depend on how and how quickly you can make your investment back.
Your job could be put at risk
The U.S. economy is already on shaky legs due to COVID-19, and unemployment is a big reason why. A government shutdown could slow any upward movement employers have made because they’ll need to secure their finances to keep the businesses afloat. Not only could this prevent new jobs, but it could also pause annual raises, or worse, trigger layoffs.
Your salary could go unpaid
If the debt ceiling is met and isn’t raised again, it could trigger a government shutdown. During this time, any funds that are paid by the federal government will go unpaid until Congress decides to reopen federal operations. If you receive income from the military or Social Security, your payments could be temporarily put on hold if an agreement on the debt ceiling isn’t met. In addition, families receiving child tax credits may also lose their payments while the government is shut down.
How to protect your finances
If you’re worried about how the debt ceiling debate will affect your quality of life, then you need to take control of the situation now as best as you can. If you don’t have an emergency fund, start one immediately so that you’ll have money to cover your bills if something should happen to your job or payments.
Next, diversify your income so that you’ll have different sources of money that can cover job loss or held paychecks. Finally, look into what resources may be available to you, such as unemployment insurance or charity assistance from organizations that can help like the Salvation Army or American Red Cross.
Above all, don’t let the theatrics get you down. Congress knows the ripple effect a shutdown can have on the economy and will work as quickly as possible to come to a compromise. Focus on the things you can control and take intentional steps to shield your finances from whatever may come.