How to Protect Your Finances From a Future Government Shutdown

Last week, Congress agreed to raise the national debt ceiling , narrowly avoiding the first default in US history. While the crisis has been averted for now, the deal gives us about two more years before we face the same risk of the government defaulting on its debt.

A government default would mean a sharp drop in stock prices, a surge in consumer prices and job losses. As an individual consumer, a lot is beyond your control: what steps can you really take to best protect yourself from a possible government default or shutdown? Here’s how to prepare your personal finances now.

When it comes to big purchases, act now…

…Or shut up forever. One of the main consequences of a default is an increase in interest rates. It affects everything from your mortgage to your student loans to your credit card.

For example, real estate website Zillow estimates that mortgage rates could reach a whopping 8.4% after default. So if you’re closing your home, act now and make sure your interest rate is fixed .

Get a High Interest Loan Now

Simply put, there are two main approaches to solving the debt problem: the debt snowball and the debt avalanche. The snowball method primarily targets your smallest debt, regardless of the interest rate, while the avalanche method prioritizes debts with the highest interest rates. When it comes to looming economic hardships, a debt avalanche is the way to go.

To use the debt avalanche strategy, Nerd Wallet recommends adding up all the minimum amounts you have to pay on your debt (excluding mortgages). Order them from the highest interest rates to the lowest; Smith says that any interest rates above 5-7% should be your priority. Then create a budget to determine the maximum amount you can afford to set aside each month to pay off your debt.

Create a financial cushion

Regardless of the state of the economy, building a solid reserve fund is a wise move. As we’ve previously advised , a typical rule of thumb is to aim for six months of living expenses in your emergency fund. Although, given the rate of inflation, you might consider raising this target to hide nine months of income.

Having such a large airbag may seem like overkill, but it’s easy to underestimate how much money you’ll need in the event of an emergency. One tactic is to first create a “starter” fund for a rainy day of about one month’s rent or mortgage payment plus your insurance deductible. Once you hit that amount, focus on paying off the high-interest debt. You can then resume building an emergency fund that can keep you going for six months or longer.

Conclusion: Don’t Panic, Get Ready

You should prepare for default just as you prepare for any recession or other economic uncertainty. In addition to the tips above, remember that when we live in fear, we make the worst financial decisions. All you can do is focus on what you can and cannot control. This means focusing on actions such as spending cuts, creating an emergency fund, and other ways to protect against the effects of a default (such as losing a job, higher inflation, and more expensive loans). Make the most of the next few years and protect your finances now before the country gets perilously close to the debt ceiling again.