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White House and House GOP negotiators rush to reach a final agreement to raise the debt ceiling of the country.
Treasury Secretary Janet Yellen issued a warning on Friday that if a deal wasn't struck by June 5, the department would not have the funds necessary to meet all obligations of the country in full and timely. The lawmakers have a few days more to come up with a package, but the X date is fast approaching.
Fitch Ratings issued a warning to the US Government on Wednesday night: raise the debt ceiling, or risk a downgrade of the largest economy in the world.
There is still no agreement to raise the debt limit, despite that X date being only a week away. This puts Americans' finances at risk.
The failure to raise the debt ceiling, which is the maximum amount of money the US government may borrow to pay off its bills, can affect many aspects of American life, including how much Americans pay for their mortgages and the paychecks they receive as federal employees.
House Majority leader Steve Scalise announced that the House would recess after votes on Thursday, as negotiators continued to work on a deal to raise the debt ceiling. Speaker Kevin McCarthy however urged members to remain close during Memorial Day Weekend.
How can Americans prepare themselves for a US debt default if it is not raised? How can you protect your financial wellbeing?
The Social Security payment could be delayed
Social Security recipients, including retirees and disabled workers, should be prepared for possible delays in receiving their monthly payments.
These people rely heavily on this money to pay for their daily expenses such as food, rent and utilities. In 2023, the average monthly benefit for retired workers will be $1,827.
According to the National Committee to Preserve Social Security & Medicare, almost two thirds of beneficiaries depend on Social Security to provide half their income. For 40% of recipients, Social Security payments represent at least 90%.
Max Richtman wrote last month to legislators that beneficiaries have earned their benefits by a lifetime's worth of hard work. They rely on them. These payments could be delayed or not paid in full, for the first ever time in American history.
Shai Akabas is the director of economics at the Bipartisan policy Center. He said that the trust fund for the entitlement program could allow the Treasury Department to continue making payments on time.
Benefits are paid out four times per month, the third Wednesday of each month. According to the Congressional Budget Office, roughly $25 billion a day is distributed.
If necessary, you can adjust your 401(k).
Martin advises you to review your equity-tobond allocation and make any necessary changes. CNN reported that stocks, which are a riskier investment than bonds, would likely become more volatile as deadline approaches.
Experts say that if the US defaults, then it must be resolved. Callie Cox of eToro US Investment Analyst, told CNN that when the US defaults, it will cause a'relief rallie' in markets.
Michael Reynolds, Glenmede's vice president of investment strategies, said that there may be an immediate corrective period following a deal, as the Treasury replenishes its cash reserves it depleted when it was unable to borrow money.
Cox stated that investors may be tempted by the dip but that there are "so many pressures on the economy."
Reynolds warned that a recession was on the horizon and it would be a mistake to overinvest. According to Reynolds, a sale is only worthwhile if the S&P 500 drops below 16% its current value.
Experts say that short-term investors need to be more cautious.
Bonds are volatile.
Investors in bonds should be prepared for volatility, even during the negotiations. US Treasuries, which are backed with the full faith of the United States and are the safest asset in the world, are at risk due to the uncertainty surrounding a debt limit deal.
The key question with Treasuries is not whether investors will get paid, but when.
CNN reported that experts assume the United States will resolve the issue quickly, even if it briefly misses the X date. The government will fulfill its obligations.
When you are investing in bonds, be sure to pay attention to the maturity date of your Treasury Bills.
Collin Martin suggested that those who had invested in Treasury Bills that would mature on or after June 1, and who needed their money then -- for instance, to pay for their own bills -- should consider selling the bills and reinvesting their funds in bills that will mature sooner.
If you are investing in bond funds, make sure that your bond portfolio is adequately diversified between intermediate and long-term bonds. Avoid a heavy weighting towards short-term, higher-yielding bonds.
Keep your investments high-quality
CNN previously advised investors to avoid corporate junk bonds and emerging market bonds. This is because high-risk debt instruments would be the first to suffer if the US defaults.
Martin stated that if you want to borrow money you must have the confidence in the markets.
Our general advice is that investors should maintain a portfolio balanced in line with their goals, and remain disciplined. In times of uncertainty, a long-term perspective is important. This was stated by Vanguard spokesperson Jessica Schifalacqua.
Moody's Analytics stated that stocks could lose up to a third of value, even if a deal is reached. This would erase $12 trillion worth of household debt.
Extra cash for military families is a good idea
Some Department of Defense employees may experience a delay in their pay -- including more than 2,000,000 federal civil servants and 1.4 million military personnel on active duty. CNN reported that federal government contractors may also experience a delay in payments. This could impact their ability to pay their employees.
Mike Hunsberger of Next Mission Financial Planning, an Air Force veteran and owner, said that military families need to have enough money in their emergency fund and extra cash on hand so they can weather a missed pay day. Hunsberger suggests that those on tight budgets look again at their spending to see if they can make any other cuts, if only temporarily.
Hunsberger explained that every military service has a group which can provide temporary loans to those in need. Some banks with a military focus could be of help.
Veterans who receive benefits from the VA should have an emergency fund prepared. Disability payments and pensions could be affected if a default occurs.