The debt ceiling limits the amount the federal government can borrow to pay bills. And while it is a serious concern that governments are spending more than they receive, this latest dispute concerns spending that has already been approved.
Kristin Benz, Director of Personal Finance and Retirement Planning at Morningstar, said: “But we have been here before, in 2011, and at least that time Congress was able to reach an agreement to raise the debt ceiling at 11. I think it is unlikely that Congress will not do so this time. But anything is possible, especially with the extreme polarization in Washington right now.”
Consumer confidence is important now as the Federal Reserve (Fed) is still battling inflation and there are concerns over the possibility of an upcoming recession. Then there were the epic failures of some major banks.
A survey found that nearly half of Americans are worried about the safety of their money in banks and other financial institutions. Gallup poll It took place in April, the month after Silicon Valley Bank and Signature Bank failed.
I wrote about this issue earlier this year and thought it important to address the anxiety people are feeling now that deal deadlines are looming. I asked him how he felt about the cap crisis.
“It is no exaggeration to say that we are stressed by the dire prospects,” wrote a disabled veteran of Indianapolis.
Jeff Leonhart, a retired public school teacher in Michigan, wrote: I am concerned and angry that the public has to endure the antics of those who supposedly work for us. ”
For many consumers, political grandstands make no economic sense.
Scott Helmers of Spirit Lake, Iowa, writes: But more than that, I worry about the country’s reputation. Circumstances are a matter of paying our commitments. The refusal of the next parliament to pay bills passed by the previous parliament perfectly illustrates the government’s instability. ”
Investors holding US savings bonds are looking to cash out for fear the government will default. A reader who holds a Series I savings bond asked if it made sense to move that money into her certificate of deposit with a yield of nearly 4%.
Do not act on fear. Pause and consider the following recommendations from financial experts. Here are the do’s and don’ts.
don’t bail out your bonds
This debt ceiling drama could culminate in a grisly last-minute deal, but don’t make hasty decisions, says Jacksonville, Fla.-based fee-only Life Planning Partners. Carolyn McClanahan, a certified financial planner she founded, warned.
To answer the question of I bondholders wondering whether she should sell, experts agree. don’t do it
“We go through this every few years and it usually works out,” McClanahan said. It’s not worth it.”
Series I savings bonds are still very safe. It also provides valuable protection against inflation, which CDs don’t, Benz said.
It is also important to remember that if the I-bond is held for less than 5 years, the last 3 months of interest will be forfeited.
Investors “will lock in guaranteed losses to avoid losses,” McClanahan said.
Finally, given the volatility that debt ceiling disruptions can bring to stocks, bonds should be held, said Russell Price, chief economist at Ameriprise Financial.
In the unlikely event of a default, the stock market would likely suffer a significant drop, which could prompt investors to rush into bonds, Mr. Price said.
“Initially, a safer investment may be fixed income securities,” he said.
don’t give up on the stock market
It’s a natural reaction to run away when you’re scared. But in this case it’s not wise.
The government is unlikely to default, Price said, but could incur losses if it jumps out of the market and Congress raises the debt ceiling at the last minute.
“People shouldn’t be making drastic adjustments,” he said. “They shouldn’t overreact.”
Instead, if you are an investor, play the long game.
“This kind of brink and uncertainty often causes volatility in stocks, so I like the idea of people with at least a 10-year spending horizon if they want to own stocks,” Benz said. “That way, even if the stock price goes down and goes down for a while, you don’t run the risk of having to touch it when you’re feeling down.”
Make sure you have enough emergency funds to weather any short-term financial turmoil, says McClanahan.
Yes, you’ve heard of this. Still, we know that many Americans don’t have enough savings for financial emergencies.
“I like the idea that retirees and other people with short-term spending needs are keeping a true cash product for very short-term needs,” Benz said.
Interest rates are rising and debt is getting higher. Defaults can make things even worse.
“The most important thing you can do is get out of debt as much as possible,” McClanahan said.
Diversify, diversify, diversify
If ever there was a time to embrace diversification, it is it.
We need cash, bonds and stocks to weather this debt ceiling storm and other economic disasters.
In addition to emergency funding, Benz recommends a mix of high-quality bonds, including government, corporate and mortgage-backed securities, covering short- and medium-term spending needs in three to ten years. .
