economy and politics

How can you prepare for a US debt default?

() — US Treasury Secretary Janet Yellen on Monday reaffirmed June 1 as the strict deadline to raise the debt ceiling, saying the United States is not expected to be able to pay off all its debts in just over a week. .

If an agreement is not reached to prevent the United States from defaulting on its debt, the country could descend into economic chaos, affecting millions of Americans, from investors to Social Security recipients.

However, consumers can take measures to safeguard their finances from some of the effects of the crisis.

There aren’t many precedents for what to do in the event of a federal default, as it has never happened before. If the government does not raise the ceiling, the United States will not automatically enter default. The Treasury Department has enough to cover some obligations, but it’s unclear what protocol it would adopt to handle payments.

So should this ever happen, here’s how you can prepare for a potential US government debt default.

Military families should save extra money

Some Defense Department workers may see their paychecks delayed, that includes more than 2 million federal civilian workers and about 1.4 million active duty military. Federal government contractors could also experience late payments, which could affect their ability to compensate their workers, previously reported.

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

Every military service has an organization that can help with temporary loans for those who might be in trouble — think a broken-down car or an emergency ticket home from a death in the family, Hunsberger said. Some military-oriented banks could also help.

Those receiving veterans’ benefits should also have an emergency reserve ready: Disability payments and pensions for some low-income US veterans and their surviving families could be affected by a default.

What will happen if the US debt ceiling is not raised? 2:17

Expect volatility in bonds

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

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

Experts assume that even if the United States briefly exceeds the “X” date, it will be resolved quickly and the Government will meet its obligations, reported.

If you invest in bonds, pay attention to the maturity of your Treasury bills.

Those who have invested in T-bills due on or immediately after June 1 and who definitely need their money at that time, for example, to pay their own bills, you might consider selling those letters now and reinvest in bills that are due earlier, suggested Collin Martin, director and fixed income strategist at the Schwab Center for Financial Research, in an interview with .

And for those in bond funds, check to see that the bond portion of your portfolio has adequate exposure to medium- and long-term bonds, rather than being overly weighted toward higher-yielding short-term bonds.

Stick to high-quality investments

Stay away from corporate junk bonds or emerging market bonds, previously reported. This is because if the US defaults, subprime 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 accordance with their objectives and to be disciplined. A long-term view is especially important during periods of uncertainty,” Vanguard spokeswoman Jessica Schifalacqua previously told .

The shares could lose up to a third of their value even if a deal is reached, wiping out $12 trillion in household debt, Moody’s Analytics said.

Make any necessary adjustments to your 401(k) plan

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

Don’t invest too much, despite the temptation

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

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

“You don’t want to invest too much with a recession on the horizon,” Reynolds said. In his opinion, a market sell is only worth taking advantage of if the S&P 500 falls 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 the event of default, but Shai Akabas, director of Economic Policy at the Bipartisan Policy Center said Treasury could continue to make payments on time because of the entitlement program trust fund.

Benefits are disbursed four times a month, on the third day of the month and on three Wednesdays. Approximately $25 billion is sent weekly, according to the US Congressional Budget Office.

— ‘s Jeanne Sahadi, Tami Luhby and Elisabeth Buchwald contributed to this report.

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