Five ways to protect your cash from a debt default
President Joe Biden has just a week to prevent the country from defaulting on its debt for the first time in history, leading to financial chaos for American households.
Negotiations between the White House and Republicans in Congress will continue today as they discuss raising the government’s $31.4 trillion debt ceiling.
Time is running out quickly, with Treasury Secretary Janet Yellen repeatedly warning that the US may not be able to pay its bills by June 1.
Analysts previously warned that a default could cause mortgage payments to skyrocket, seven million jobs to be lost and investment to plummet.
Separately, rating agency Fitch said a default could put the country’s “AAA” credit rating on negative alert.
Now experts are urging households to prepare for a worst-case scenario.
Dailymail.com has collected the top five tips for households to prepare for a default
“The closer we get, the more realistic the possibility that we have an outright disaster becomes,” said David Wilcox, a director of Bloomberg Economics. CNN.
Here, Dailymail.com has rounded up the top five tips households should keep in mind to prepare for the worst.
Social security payment arrears budget
Social Security payments can be suspended overnight if the country is unable to meet its debts.
About 66 million retirees, disabled workers and others receive monthly benefits that average $1,827 per month. About two-thirds of beneficiaries depend on social security for at least half of their income.
About $25 billion is shipped every week, according to the Congressional Budget Office.
President Joe Biden has just a week to prevent the country from defaulting on its debts for the first time in history
Other government payments could also be affected, including funding for food stamps and municipalities for Medicaid.
In addition, about two million federal civilian workers and 1.4 million active duty military could delay their paychecks.
Households dependent on these checks should therefore start by preparing an emergency fund and budget for a default.
“Now is the time to house your resources. Hold back on your discretionary spending,” Wilcox said CNN.
“Avoid that extra restaurant meal until this situation is resolved.”
Don’t invest too much
A default could trigger a “relief rally” in the market, enticing investors to put their money into stocks while they are low.
Moody’s Analytics previously said stocks could lose up to a third of their value even if a deal is reached. The result would be $12 trillion wiped out of household debt.
But added pressure on the economy means that investing while stocks are low can be extremely risky – and it’s rarely a good idea for amateur investors to try and time the market.
Vanguard spokesperson Jessica Schifalacqua told CNN, “Our general guideline is that investors should maintain a balanced portfolio that is consistent with their goals and remain disciplined.
‘A long-term vision is especially important in periods of uncertainty.’
Meanwhile, Teresa Ghilarducci, a labor economist and retirement security expert at The New School, told me NPR: “Fight your worst instinct to react to the news.
“All the academic research shows that when you buy and hold, you do so much better than when you try to follow market trends, whether that’s responding to an economic crisis or a recession.”
The key is also not to panic, as stocks have historically roared after major declines.
Experts say now is the time to stick to ‘high quality’ investments as stocks become more volatile ahead of the potential default
Consider customizing your 401K
Volatility in the stock market can affect your 401K, depending on your allocation from stocks to bonds.
Employees may therefore want to review and adjust where necessary the investments associated with their pension fund.
Equities have traditionally been riskier than bond investments and are more likely to fluctuate as the deadline approaches, meaning they will come under the most pressure.
As a result, experts recommend that you should consider increasing your bond allocation and sticking to high-quality investments.
Put your dreams of buying a home on hold
The average 30-year fixed home loan skyrocketed to 7.03 percent, according to Bankrate data for Tuesday
Homeowners could see mortgage rates rise to 8.4 percent by September, according to real estate platform Zillow.
In real terms, it would increase average mortgage repayments by 22 percent.
This week, the average mortgage interest rate rose above 7 percent for the first time since March.
As a result, experts recommend that homebuyers may want to wait for rates to stabilize before committing to an expensive deal.
Jully-Alma Taveras, personal finance expert at InvestingLatina.com, said this means households may need to continue renting for the foreseeable future.
Artin Babayan, a home loan officer in Los Angeles, told me NPR“You’re going to see a dramatic drop in buyers and when that happens, you’re going to see home prices fall, several construction and home improvement projects shut down.”
Pay off your credit cards
A default could push up interest rates – meaning households should try to pay off their debts while they still can
A default could lead to an increase in US Treasury yields to account for the increased risk.
Treasury yields generally set the benchmark for interest rates, loans, credit cards and mortgages.
It means that the repayment rates on all these loans could increase even further.
If households are able to do so, it is advisable to pay off any debts to avoid rising borrowing costs.
In addition, it is best not to take out new loans, such as for a car, and wait for interest rates to settle.