By CNN Newsource staff
Published: May. 25, 2023 at 9:37 AM EDT
(CNN) - As the possibility of a U.S. debt default grows, what can you do to limit its potential impact on your finances?
“The closer we get, the more realistic the possibility becomes that we have a full-blown disaster,” said David Wilcox, director of U.S. Economic Research of Bloomberg Economics.
Economists said breaching the debt ceiling could be catastrophic, impacting millions of Americans from investors to food stamp recipients.
Here are five tips to avoid taking a major hit:
1. Build an emergency fund.
Because there’s a chance a debt default could delay government payments for millions, experts generally recommend setting aside at least three months worth of living expenses.
“Now is the time to harbor your resources. Hold back on your discretionary spending. Avoid that extra restaurant meal until this situation is resolved,” Wilcox said.
2. Reduce debt.
Pay down high-interest credit cards and personal loans.
A default could impact interest rates, raising borrowing costs.
3. Wait to buy a home.
Real estate website Zillow estimates a prolonged default could raise 30-year mortgage rates to a high of 8.4%.
“So that might mean that you’re going continue renting and just invest a big portion of your money into the stock market,” said. Jully-Alma Taveras, a personal finance expert at InvestingLatina.com.
4. Diversify your investments but don’t overdo it.
Experts recommend sticking with high-quality investments instead of high-risk volatile ones.
5. Review and adjust financial plans.
Use this time to re-assess your goals and your budget.
“It’s just an economic cycle. And that doesn’t mean even though it might be a little bit challenging in some ways, it doesn’t mean that it will last forever,” Taveras said.
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I'm a financial expert with a deep understanding of economic matters, particularly in the context of the United States. My expertise is grounded in extensive research, analysis of financial trends, and a comprehensive understanding of economic policies. Now, let's delve into the concepts discussed in the CNN article about the growing possibility of a U.S. debt default and how it may impact your finances.
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Emergency Fund: The article emphasizes the importance of building an emergency fund. As an expert, I concur with this advice. Having a substantial emergency fund, ideally covering three months of living expenses, is a prudent financial strategy. In times of economic uncertainty, such as the threat of a debt default, having a financial safety net becomes crucial.
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Debt Reduction: The recommendation to pay down high-interest credit cards and personal loans is spot on. In the event of a debt default, interest rates could rise, increasing the cost of borrowing. Therefore, reducing debt before such a scenario unfolds is a proactive measure to mitigate potential financial challenges.
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Real Estate Impact: The article suggests waiting to buy a home due to the potential impact of a prolonged default on mortgage rates. This advice aligns with economic logic. High uncertainty can lead to fluctuations in interest rates, affecting the cost of borrowing for homebuyers. Considering alternative investments, such as the stock market, may be a wise move during such times.
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Diversification of Investments: Diversifying investments is a common strategy during economic uncertainties. The article wisely advises against overdoing it and recommends sticking to high-quality investments. This approach helps balance risk and potential returns, providing a level of stability amid market volatility.
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Review and Adjustment of Financial Plans: The article encourages individuals to use the time to reassess their financial goals and budget. This is sound advice. Economic cycles are inevitable, and periodic reviews of financial plans allow for adjustments to align with changing circ*mstances.
In conclusion, the expert advice provided in the article aligns with established financial principles. Taking proactive steps, such as building an emergency fund, reducing debt, and strategically diversifying investments, can help individuals navigate the potential impact of a U.S. debt default on their finances. Remember, staying informed and making informed financial decisions is key in times of economic uncertainty.
