President Joe Biden has just a week to prevent the country from defaulting on its debt for the first time in history – wreaking financial havoc on American households.
Negotiations between the White House and Republicans in Congress continue today as they discuss raising the government’s $31.4 trillion debt ceiling.
Time is of the essence, and Treasury Secretary Janet Yellen has repeatedly warned that the US may not be able to pay its bills as soon as June 1st.
Analysts previously warned that a default could cause mortgage payments to skyrocket, seven million jobs to be lost and investment to fall.
Separately, rating agency Fitch said a default could take the country’s “AAA” credit rating negative.
Now experts are urging households to prepare for the worst-case scenario.
has compiled the top five tips for households to prepare for a debt default
“The closer we get, the more realistic the possibility that we’re going to see a full-blown catastrophe,” David Wilcox, director at Bloomberg Economics, told CNN.
Here, has compiled the top five tips households should keep in mind to prepare for the worst.
Social Security Late Payment Budget
Should the country default on its debt, Social Security payments could be suspended overnight.
About 66 million retirees, disabled workers and others receive monthly benefits that average $1,827 per month. Around two-thirds of beneficiaries depend on social security for at least half of their income.
About $25 billion is spent every week, according to the Congressional Budget Office.
President Joe Biden has just one week to prevent the country from defaulting on its debt for the first time in history
Other government payments could also be affected, including food stamp funding and municipality funding for Medicaid.
In addition, approximately two million federal civilian employees and 1.4 million active duty military personnel could experience delays in their payroll payments.
Households that rely on these checks should therefore start preparing an emergency fund and budget for a default.
“Now is the time to house your resources. Restrain spending as you see fit,” Wilcox told CNN.
“Avoid the extra food in the restaurant until this situation is resolved.”
Don’t invest too much
A default could lead to a “relief rally” in the market, which could tempt investors to put their money into stocks while they’re down.
Moody’s Analytics previously said even if a deal were reached, shares could lose up to a third of their value. The result would be $12 trillion in household debt.
However, due to the added pressure on the economy, investing when stock levels are low can be extremely risky — and it’s rarely a good idea for amateur investors to try to time the market.
Vanguard spokeswoman Jessica Schifalacqua told CNN, “Our overall recommendation is that investors maintain a balanced portfolio consistent with their goals and remain disciplined.”
“In times of uncertainty, a long-term perspective is particularly important.”
Meanwhile, Teresa Ghilarducci, labor economist and pension security expert at The New School, told NPR, “Fight your worst instinct to react to the news.”
“All academic research shows that you do much better by buying and holding than by trying to follow market trends, whether in response to an economic crisis or a recession.”
The key is also not to panic, as stocks have historically bounced back from large declines.
Experts say now is the time to stick with “quality” assets as stocks become more volatile ahead of a potential default
Consider customizing your 401K
Stock market volatility could affect your 401K depending on your stock-to-bond allocation.
Workers may therefore want to review the investments associated with their retirement plans and make adjustments as necessary.
Stocks have traditionally been riskier than bond investments and are more likely to fluctuate as the deadline approaches — which means they come under the most pressure.
Experts therefore suggest that you should consider increasing your bond allocation and stick with quality assets.
Put your home buying dreams on hold
According to data from Bankrate on Tuesday, the average 30-year fixed-term home loan shot up to 7.03 percent
According to real estate platform Zillow, homeowners could expect mortgage rates to rise to 8.4 percent by September.
In real terms, this would increase the average mortgage repayment by 22 percent.
This week, average mortgage rates rose above 7 percent for the first time since March.
Therefore, experts advise homebuyers to wait until prices stabilize before entering into a costly agreement.
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 real estate loan officer based in Los Angeles, told NPR, “The number of buyers will drop dramatically, and when that happens, house prices will fall and various construction and home improvement projects will be halted.”
Pay off your credit cards
A default could send interest rates skyrocketing – meaning households should try to pay down their debts now while they can
A default could cause US Treasury yields to rise to reflect the increased risk.
Government bond yields are generally used as a benchmark for interest rates, credit, credit cards, and mortgages.
This means that the repayment rates for all of these loans could increase even further.
If households are able to do this, it is advisable to pay off any debt to forestall rising borrowing costs.
In addition, it’s best to stop borrowing, say, for a car, and wait for interest rates to stabilize.