Debt Ceiling Explained: What You Need to Know

Debt Ceiling Explained: What You Need to Know Fitzwilliams Financial

Basics of the Debt Ceiling

The national debt ceiling pertains to the maximum amount of funds the US Government can borrow to cover its expenditures. These expenses include various items such as military salaries and purchases, tax refunds, Social Security and Medicare benefits, and interest payments on any outstanding debt. The country currently operates with a budget deficit, which means that its expenditure exceeds its earnings. Thus, the government is obliged to borrow from other nations to cover its expenses.[1]

The nation has a limit on the amount of money it can borrow, known as the debt ceiling. Although it can be increased by Congress, political and budget disagreements in Congress can make it challenging to come to agreements.[2]

How Does the Debt Ceiling Affect You?

If the United States hits the debt ceiling and is unable to borrow more money, it will default on its loans. This, in turn, would lead to a series of severe consequences for consumers, which include:

  1. A delay in federal benefits, such as Medicare and Social Security payouts.[3]
  2. A pay freeze for military personnel and individuals employed in government-funded jobs.[4]
  3. A recession could occur that could lead to job cuts and widespread unemployment.[5]
  4. A surge in interest rates. In the same way someone gets a higher interest rate if they are less credit-worthy, the US Treasuries would need to increase their interest rates to entice more buyers of the debt. Remember, Treasury bond interest rates are often connected via market forces to the average person’s interest rates on home loans, business loans, and credit cards. Therefore, even the average American may experience an increase in costs of debt if the country’s budget were to default.[6]

What Should You Do?

If you’re looking for ways to safeguard your finances in case of an economic downturn, consulting a financial expert is a smart move. A financial advisor can assist you in sorting out your finances, assessing potential risks, and keeping tabs on the current economic climate, helping you gut-check your decision-making. For a complimentary assessment of your financial situation, get in touch with one of our specialists today.