The idea of the U.S. defaulting on its debt can be scary. Unfortunately, if it does occur it may significantly impact your personal finances. Here are ten money mistakes experts warn you to avoid in the event that the U.S. does default on its debt.
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Avoid Large Purchases on a Credit Card
If there is a debt default, it will have drastic results on interest rates. “The risks engendered by the default would cause interest rates to skyrocket, including those on the financial instruments that households and businesses use—Treasury bonds, mortgages, and credit card interest rates,” said the Biden White House in a statement.
Adding to your indebtedness could result in additional burdensome interest on your debt.
“Fight your worst instinct to act on the news,” says Teresa Ghilarducci, retirement security expert at The New School. Panic is understandable when circumstances beyond our control impact our money. This fear can lead to emotional decisions.
If there is a debt default, it’s best to not give into financial anxiety. Instead, calmly look at your finances and make measured decisions.
Avoid Buying a Car
Borrowing costs will likely increase across the board in the event of a debt default. This includes auto loans. If you’re in the market, you may want to decide if you can wait.
At the very least, use this as a time to shop around and compare lenders to find the best rate.
Avoid Raiding Your 401(k)
Withdrawing your funds from a 401(k) is an understandable reaction to financial hardship. Unfortunately, removing funds from your 401(k) can cause problems.
You will likely incur a significant tax hit. You may also sacrifice matching funds from your employer. That’s not to mention hindering your retirement savings.
Don’t Stop Investing
“The best way for investors to achieve their own success is by focusing on the things that they can control: saving regularly, keeping costs and taxes from eating away at your nest egg and knowing what you need to meet your goal.” says Joel Dickson, the global head of advice methodology at Vanguard.
Investing in the stock market is a long-term game. Don’t let a short-term blip throw you off course.
Not Having a Plan For Your Money
Not having a plan for your money leaves you aimless. “And that’s where we talk about the importance [of] preparing for the unexpected,” says Dickson.
Now is a perfect time to look at your finances and reanalyze your goals. If you need to create a budget, do that to help you see where every dollar is going.
Not Supplementing Your Income
A default will result in a delay of paychecks for some individuals. Others may see their hours cut back at work. If this impacts you, look for ways to make money on the side to supplement lost income.
Pausing Your Retirement Contributions
“Be fearful when others are greedy and greedy when others are greedy,” is a well-known quote from the Oracle of Omaha, Warren Buffet. The saying holds true now.
Many people are fearful. Don’t let that fear hold you back. Historically, the stock market performs well after minor blips of tumult.
Don’t Delay Paying off Debt
“We’re advising people to prepare for a potential default as you would for an impending recession,” says Anna Helhoski of NerdWallet. One way to prepare for times like these is to eradicate debt.
Interest rates are likely to go up in the case of a debt default. Don’t delay paying off debt as higher interest rates will likely only make it more difficult.
Don’t Stop Saving Money
“Any default still doesn’t change the fact that the Federal Deposit Insurance Corporation (FDIC) ensures deposits up to $250,000 per depositor, per account,” says Urooj Khan, professor at Texas’ McCombs School of Business.
Your money is still available to you, regardless of whether there’s a default. Continue saving and growing your emergency fund as it will help you in the long-term.
Needless Expenses to Avoid if You Can’t Make Ends Meet
Living paycheck to paycheck makes debt payoff difficult to accomplish. By cutting a few needless expenses you can free up cash to throw at your debt. Who knows, you may not even miss it.
35 Proven Ways to Save Money Every Month
Many people believe it’s impossible to save money. Or, they think saving $20 or $30 a month won’t amount to anything. Both are incorrect. There are many simple money-saving tricks that can amount to significant savings. You just have to start one, then another, to increase your savings.
101 Ways to Make Money on the Side
Earning extra money is a fantastic way to make ends meet. But which opportunities will help you the most? There are plenty of ways to make money on the side. Find one that works for you and pocket the cash.
I’m John Schmoll, a former stockbroker, MBA-grad, published finance writer, and founder of Frugal Rules.
As a veteran of the financial services industry, I’ve worked as a mutual fund administrator, banker, and stockbroker and was Series 7 and 63-licensed, but I left all that behind in 2012 to help people learn how to manage their money.
My goal is to help you gain the knowledge you need to become financially independent with personally-tested financial tools and money-saving solutions.