How you can prepare for a debt default

CNN/ Newswire | 5/23/2023, 8:47 a.m.
Treasury Secretary Janet Yellen reaffirmed June 1 as the hard deadline to raise the debt ceiling on Monday, saying she …
Consumers can take steps to safeguard their finances from some of the effects of the debt ceiling crisis. Mandatory Credit: Saul Loeb/AFP/Getty Images

Originally Published: 23 MAY 23 08:15 ET

By Ramishah Maruf, CNN

New York (CNN) — Treasury Secretary Janet Yellen reaffirmed June 1 as the hard deadline to raise the debt ceiling on Monday, saying she expects the United States will be unable to pay all of its bills in a little over a week.

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What happens if the U.S. runs out of money?

As time is running out to avert a U.S. debt default, CNN Chief Business Correspondent Christine Romans reports on what could happen in the U.S. and abroad if a deal is not reached. Source: CNN

If an agreement isn’t reached to prevent the United States from defaulting on its debt, the country could descend into economic disarray, affecting millions of Americans from investors to Social Security beneficiaries.

Nevertheless, consumers can take steps to safeguard their finances from some of the effects of the crisis.

There isn’t much precedent on what to do in case of a default, since it’s never happened before. If the government doesn’t raise the ceiling, the United States won’t automatically go into default. The Treasury Department has enough to cover some obligations, but it’s uncertain what protocol it would adopt to handle payments.

Here’s how you can prepare for a potential debt default.

Military families should keep extra cash

Some Department of Defense workers may see their paychecks delayed — that includes more than 2 million federal civilian workers and around 1.4 million active-duty military members. Federal government contractors could also see a lag in payments, which could affect their ability to compensate their workers, CNN previously reported.

Mike Hunsberger, owner of Next Mission Financial Planning and an Air Force veteran, said military families should make sure they have extra money and that their emergency funds are topped off to weather a missed paycheck. For those with thin budgets, Hunsberger suggested looking again to see if there’s anything else to cut back on, at least temporarily.

Every military service has an organization that can help with temporary loans for those who could be in a crunch — think a car breaking down or an emergency ticket home for a family death, Hunsberger said. Some military-facing banks could also be of assistance.

Those who receive veterans benefits should also have an emergency stockpile prepared — disability payments and pensions for some low-income veterans and their surviving families could be affected by a default.

Expect volatility in bonds

Bond investors should expect volatility even during deal negotiations. US Treasuries are considered to be the world’s safest assets because they are backed by the full faith and credit of the United States, but the uncertainty over a debt ceiling deal adds risk.

With Treasuries, the key question is when investors will be repaid, not if.

Experts assume even if the US briefly goes past the X-date, it will be resolved quickly and the government will make good on its obligations, CNN reported.

If you invest in bonds, pay attention to when your Treasury bills are maturing.

Those who have invested in Treasury bills maturing on or right after June 1 and who definitely need their money at that time — for example, to pay their own bills — might consider selling those bills now and reinvesting in bills that mature sooner, Collin Martin, director and fixed income strategist at the Schwab Center for Financial Research, suggested in an interview with CNN.

And for those into bond funds, check to see that the bond portion of your portfolio has adequate exposure to intermediate and longer-term bonds, rather than being too heavily weighted toward short-term higher yielding bonds.

Stick with high-quality investments

Steer clear of corporate junk bonds or emerging market bonds, CNN has previously reported. That’s because if the US does default, high-risk debt instruments will come under the most pressure.

“If you need to borrow money, you need the confidence of the markets to lend to you,” Martin said.

“Our general guidance is for investors to maintain a balanced portfolio in keeping with their goals and to remain disciplined. A long-term view is especially important during periods of uncertainty,” Vanguard spokesperson Jessica Schifalacqua said previously told CNN.

Stocks could shed as much as a third of their value even if an agreement is reached, erasing $12 trillion in household debt, Moody’s Analytics said.

Make necessary adjustments to your 401(k)

Review your equity-to-bond allocation and make any necessary adjustments, Martin advised. Stocks, which are riskier investments than bonds, will probably get more volatile as the deadline date approaches, CNN has reported.

Don’t over invest, despite temptation

If the US does default, it has to then be resolved, experts say. And when it does, there will be a “relief rally” in the market, Callie Cox, eToro US investment analyst, previously told CNN. However, there could be an immediate correction period after a deal is reached as the Treasury replenishes the cash it burned through when it couldn’t borrow money, Michael Reynolds, vice president of investment strategy at Glenmede said to CNN.

Investors may be tempted to buy the dip, but there are “so many other pressures weighing on the economy,” Cox said.

“You don’t want to get over-invested with a recession on the horizon,” Reynolds said. In his view, it’s only worth taking advantage of a market sale if the S&P 500 dips below 16% of its current value. Short term investors should be even more cautious, experts said.

Prepare for Social Security delays

The average payment for one of the 66 million people who receive Social Security benefits is $1,827 a month in 2023. These payments could be delayed in a debt default, but Shai Akabas, director of economic policy at the Bipartisan Policy Center, said the Treasury could continue making on-time payments because of the entitlement program’s trust fund.

The benefits are disbursed four times a month, on the third day of the month and on three Wednesdays. Roughly $25 billion a week is sent out, according to the Congressional Budget Office.