How a U.S. Debt Default Could Hit Your Finances

Though average Americans have no control over the U.S. debt ceiling being raised, a default could directly impact them.

×
A person using a calculator
Getty Images
By Sharon Epperson

If Washington fails to agree on legislation to raise the debt ceiling and the United States defaults on its debt obligations, it would be devastating to the U.S. economy. Putting into question the full faith and credit of the U.S. Treasury could send financial markets, not only here but likely around the world, into a tailspin.

Though average Americans have no control over whether that will happen, it could have serious consequences for your personal finances.

The fact is you don't know what will happen, and many analysts and traders on Wall Street are adamant that Washington lawmakers will not allow the United States to default. So in the meantime, it is important to keep calm and focus on the aspects of your financial life that you can control.

Pay Down Your Own Debts

If the U.S. defaults and its credit rating suffers, it may have to offer higher interest rates to lure investors to buy U.S. Treasury securities. If the government's borrowing costs go up, borrowing costs for some homeowners and credit card holders may go up as well.

If you have an adjustable-rate mortgage, the rate will eventually go up and your payment may increase hundreds of dollars a month. What can you do? You could make an extra payment now -- as much as you can comfortably afford. So while your rate will still go up, you'll be paying that interest on a smaller amount of the overall pie. Credit card rates will increase too. Pay off your credit card debt. It's never a good idea to carry a balance from one billing cycle to the next, but it will be especially painful if rates -- which are already more than 15 percent on average -- move even higher.

Don't Keep Money That You'll Need in 5 Years or Less in Stocks

The S&P 500 plunged 17 percent after the last debt limit stalemate in August 2011 -- and that crisis was averted in the 11th hour.
Still, it took about seven months for the stock market to recover after that. If the U.S. actually breaches the debt ceiling deadline this time, the impact on stocks and equity mutual funds could be even more devastating. But that doesn't mean you should rush to sell.

Most financial advisers will tell you that the markets will recover, eventually. For most Americans, stocks should be long-term investments. If you need the money that you've put in the stock market in the next year or even five years, it should be in cash, not stocks.

Rebalance and Diversify Your Retirement Portfolio

If the debt ceiling stalemate doesn't end, retirement accounts could be very hard hit. A report out Tuesday from the American Society of Pension Professionals and Actuaries predicts private pension plans will take a hit of more than $2 trillion (losing in excess of 20 percent of their value) if the financial markets tumble as a result of a default.

This is a very scary proposition for seniors, but also should be a wake-up call for every investor. Reallocate retirement-plan assets to make sure they are well-diversified among many different types of investments.

Put Your Best Foot Forward on the Job

Hiring could come to a standstill if the U.S. is in the midst of another financial crisis. An uncertain political and economic climate could stifle job growth. Your job, your career, is likely your biggest financial asset.

When the economy is in crisis, a good job is even harder to come by. You don't want to lose it. Continue to make yourself as professionally marketable as possible.

Cut Spending to Build Up Your Cash Savings

Another major factor that you can control is the amount of cash you keep on hand. Don't arbitrarily sell all of your investments or cash out of your retirement or college savings plans. Work on building the cash cushion. So many Americans don't have one. You may not want to think about the emergencies that often necessitate having this money on hand, such as unforeseen medical bills, housing repairs or job loss.

You may think you don't have any extra money to spare to put in your "rainy day" fund. But you have to find some money somewhere. Figure out what expenses you can cut and save those dollars. Start by saving up to cover just one month worth of expenses, then increase your savings to three months or six months. Ideally, you may want to have a year's worth of cash in the bank to cover your daily household expenses.

Again, no one knows for sure if the United States would default, but taking these steps now to shore up your personal finances should take some anxiety out of the debt ceiling countdown.


More from CNBC:



Increase your money and finance knowledge from home

How to Buy a Car

How to get the best deal and buy a car with confidence.

View Course »

How Financial Planners go Grocery Shopping

Learn to shop smart and save.

View Course »

Add a Comment

*0 / 3000 Character Maximum

42 Comments

Filter by:
pdbliz

PEOPLE,,OF BOTH SIDES,,,
LAUGH IF YOU WANT,,,,,,,,,,,CHECK OUT THE HEALTH CARE .....CHECK WITH YOUR DOCTOR....
ASK QUESTIONS,,,THE GOVERMENT DOES NOT WANT YOU TO KNOW...

October 15 2013 at 9:31 PM Report abuse rate up rate down Reply
WILLS

We shall see what happens as it should be interesting - S.S. pays on the 23 and if it don't?

October 15 2013 at 7:08 PM Report abuse rate up rate down Reply
rjen164497

By law America can not default on it's debts. You are being lied to by Media and Politicans. The income to the treasury is higher then last year so there is more then enough money coming in every months. Come on Americans don't be so stupid.

October 15 2013 at 6:03 PM Report abuse +1 rate up rate down Reply
2 replies to rjen164497's comment
WILLS

If that were true we would not need S.S. - the payment (in) cover the interest on the debt

October 15 2013 at 7:07 PM Report abuse rate up rate down Reply
pdbliz

TRUE,,,,TRUE,,,,,,,,,,,BY LAW,,,,WE WILL NEVER ,,DEFAULT....

October 15 2013 at 9:29 PM Report abuse -2 rate up rate down Reply
JIM

Maybe Obama could quit flying his dogs in their own private plane everywhere they go. That would save a few million dollars a year. Plus he could cut down his wife's entourage, and that would also cut a few million dollars a year.

October 15 2013 at 5:07 PM Report abuse -1 rate up rate down Reply
skiyourbunsoff

Strange that these recommendations are good for individuals, but not for government?!?!?! Continue the shutdown! Let's see what happens when the debt ceiling is not increased.

October 15 2013 at 4:12 PM Report abuse rate up rate down Reply
rsschwein

it started when clinton/bush/ and ross peroe was running for office. free trade was a joke then and still is. they shipped good paying job'S OVERSEA's. THE JUNK THAT COME'S FROM CHINE IS THAT. JUNK

October 15 2013 at 3:41 PM Report abuse +2 rate up rate down Reply
2 replies to rsschwein's comment
JIM

You have the unions to thank for all the businesses moving out of America. When a nonskilled, non-educated person wants to get paid $30-40 an hour with 4-6 weeks vacation to start, and the skilled labor gets paid about $20 an hour to start with 2 weeks vacation in the same area, it does not take a genius to realize that they need to move their company elsewhere.

October 15 2013 at 5:09 PM Report abuse rate up rate down Reply
pdbliz

SPOKEN WELL,,,,THIS IS TRUE.......
IF ROSS STAYED OUT,,,,REPUBLICANS WOULD HAVE RUN....

October 15 2013 at 9:29 PM Report abuse rate up rate down Reply
pdbliz

THE MEDIA IS USING ,,SMOKE AND MIRROWS TO HIDE ,,,,WHAT IS HAPPING TO OBAMA CARE,,,,,,,, THE LINES ARE NOT OVER LOADED,,,,,IT IS ON PURPOSE............YOUNG PEOPLE....WILL BE PAYING OUT THERE BUTT HOLE INTO HEALTH CARE.........POOR PAY NOTHING,,,BUT,,,WAIT TILL YOU SEE THE MET DEDUCTIONS YOU HAVE TO PAY,,AND,,ALREADY SOME DOCTORS ARE MAKING YOU PAY UP FRONT,,THE FULL DEDUCT BEFORE THEY TREAT YOU...
LAUGHT NOT,,,,,,CHECK IT OUT.!!!!

October 15 2013 at 2:51 PM Report abuse -2 rate up rate down Reply
Tim

The media and politicians are misleading on this subject. Just because the govt reaches its debt limit does not mean that it does not have money to service the debt. The govt continues to receive tax revenue. Just like each of us, the goverment can use tax revenue to service its debt payments. It simply has to decide what spending it will cut. If we elect to rack up more debt and obligations than we have in personal income we are not at liberty to demand our employers pay us more. Same is true of the government - there comes a point when enough borrowing is enough and as a nation we have to live within our means. When does the government have to be held accountable for out of control spending?

October 15 2013 at 12:24 PM Report abuse +4 rate up rate down Reply
bchrist751

Just increase the borrowing limit to $25 Trillion... Our Grand Kids can pay back out debt.

October 15 2013 at 10:18 AM Report abuse -3 rate up rate down Reply
vpqueen

Of course, Sharon Epperson is an errand girl for the White House, and she SHOULD no that there would be no default if the debt ceiling wasn't raised. In fact, debt service is prioritized by law. What WOULD be required is that the government live within its means. For you libs, that means "cutting spending".

October 15 2013 at 8:54 AM Report abuse rate up rate down Reply