New York (CNN) — Treasury Secretary Janet Yellen Reconfirmed June 1 as a tight deadline raise the debt ceiling He said Monday he expects the US to be unable to pay all its bills in just over a week.
Without a deal to prevent the U.S. from defaulting on its debt, the country could plunge into economic turmoil, affecting millions of Americans, from investors to Social Security beneficiaries.
Nevertheless, consumers can take steps to protect their finances from some of the effects of the crisis.
Defaults have never happened before, so there’s not much precedent for what to do in the case of defaults. The U.S. will not automatically default unless the government raises the cap. The Treasury Department has sufficient funds to cover some of its obligations, but it is unclear what protocol it will adopt to process payments.
Here’s how to prepare for potential default.
Consumers can take steps to protect their finances from some of the effects of the debt ceiling crisis.
Military Families Should Keep Extra Cash
Some Pentagon employees may be behind on salaries, but that includes more than 2 million federal civilian employees and about 1.4 million active-duty military personnel. Federal contractors may also experience delays in payments, which could affect their ability to compensate workers. CNN previously reported.
Air Force veteran Mike Hunsberger, owner of Next Mission Financial Planning, said military families should set aside extra money and replenish emergency funds to survive outstanding paychecks. . For those on a tighter budget, Hunsberger suggested rethinking whether there are other cuts, at least temporarily.
Hunsberger said every military service has organizations that help provide temporary loans for people who may be in need, such as emergency tickets due to car breakdowns or the death of a family member. Some military-affiliated banks may also help.
Recipients of Veterans Benefits should also have an emergency stockpile. Disability benefits and pensions for some low-income veterans and their survivors could be affected by default.
Anticipate bond volatility
Fixed income investors need to anticipate volatility even during trade negotiations. U.S. Treasuries are considered the safest assets in the world because they are fully backed by the trust and credit of the United States, but uncertainty over the debt ceiling deal adds to the risks.
In the case of U.S. Treasuries, the key question is not whether investors will be paid back, but when.
Experts expect problems to be resolved soon and government to meet obligations, even if US temporarily past X-date, CNN report.
When investing in bonds, pay attention to the maturity of Treasury Bills.
People who have invested in Treasury bills that mature on or shortly after June 1 and definitely need the money at that time (for example, to pay their bills) I might consider selling those banknotes now In an interview with CNN, Colin Martin, director and fixed-income strategist at the Schwab Center for Financial Studies, suggested reinvesting in notes that mature sooner.
Also, for those interested in bond funds, make sure that the fixed income portion of your portfolio has adequate exposure to medium- and long-term bonds rather than being overly skewed toward short-term high-yield bonds.
continue to invest in quality
Avoid corporate bonds and emerging market bonds. CNN previously reported. Because if the U.S. were to default, riskier bonds would be under the most pressure.
“If you need to borrow money, you need the confidence of the market to lend you,” Martin said.
“Our general guidance is for investors to maintain a balanced portfolio in line with their goals and to remain disciplined. A long-term perspective is especially important in times of uncertainty,” said Vanguard. Publicist Jessica Sifalakua previously told CNN.
Even if a deal is reached, stocks could fall by up to a third and $12 trillion in household debt could disappear, according to Moody’s Analytics.
Make any necessary adjustments to the 401(k)
Martin advised to review the allocation of stocks and bonds and make any necessary adjustments. Stocks, a riskier investment than bonds, will likely become more volatile as they near expiry. CNN reported.
Don’t overinvest when tempted
If the U.S. defaults on its debt, it needs to be resolved, experts say. And if that happens, there will be a “bailout backlash” in the market, says Karrie Cox, an eToro US investment analyst. previously told CNN. But Michael Reynolds, vice president of investment strategy at Glenmead, told CNN that there could be an adjustment period soon after the deal is signed to replenish the cash the Treasury has run out of because it can’t borrow. .
Investors may be tempted to buy dips, but “there are so many other pressures on the economy,” Cox said.
“With a recession looming, overinvestment is not desirable,” Reynolds said. In his view, it’s only worth taking advantage of a market sell-off if the S&P 500 falls below 16% of its current value. Experts say short-term investors should be even more cautious.
Preparing for Delays in Social Security
In 2023, the average payment for one in 66 million people who receive Social Security benefits will be $1,827 per month. Defaults could delay those payments, but Shai Aqabath, economic policy director at the Bipartisan Policy Center, said the finance ministry could. Keep paying on time thanks to the Trust Fund of the Entitlement Program.
Benefits are paid four times a month, on the 3rd and Wednesday of the month. About $25 billion is transferred weekly, according to the Congressional Budget Office.
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