Money Monday: How the Debt Ceiling Conversation Affects Your Finances

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Whatever your political affiliation, the idea of not raising the United States debt ceiling should be of great concern to you. According to some predictions, the date known as the X date, could occur as early as June this year. The X date is the day when the United States can no longer pay its bills or meet its financial obligation. You may think that this debt ceiling conversation is just political rhetoric and brinkmanship; but I am here to inform you that should the ceiling not be raised, there are some real-world impacts and consequences for all of us.

What is the Debt Ceiling?

The simplest way to explain it is through the analogy of your credit card, with several exceptions. The debt ceiling relates to money the United States has already spent. Unlike your credit card limit which represents all you can spend, the debt ceiling is for funds already spent by the government, based upon prior policies and spending obligations. In other words, the debt ceiling is not raising the limit to what anticipated  spending will be, instead, it is raising the limit to pay for what has already been spent.

The debt ceiling represents the maximum amount of money the government can borrow to pay its debts. It does not look forward, but backward. Therefore, if the government is unable to borrow more money (the ceiling is not raised), then the government will be unable to pay its obligations.

The debt ceiling is very different from a government shutdown. When there is a government shutdown, it means that Congress did not renew the annual expired funding for government operations.

Therefore, federal government employees will be working through a debt ceiling impasse. The national parks and other government agencies would likely remain open, while federal employees’ paychecks would be delayed because the government does not have enough money to pay all its bills. The government would have to make choices in which bills to pay and when. Let’s just say it’s a case of “robbing Peter to pay Paul”.

Is it My Problem?

Even when it is not the topic of a stump speech in nationwide elections, and even if you are not a politician, failure to raise the debt ceiling is relevant to ordinary people. It will affect the finances, especially for some of us, directly. For example, when the government has to make choices concerning whom to pay, and if you are a federal employee, you will be required to work, but will have to live on an IOU for your pay, rather than a paycheck.  If you lack a healthy emergency fund, you could face trouble.

You should be concerned if you are a contractor and conduct business with the federal government, or some pass-through entity funded by the federal government. If you are an employee of a business or organization which depends heavily on federal government resources, it’s time to put a plan in place to address this looming financial crisis.

How is it your problem? It’s your problem because your credit card, car loan and mortgages could change. Because the federal government has never defaulted on its payments, lenders have felt secure in making loans through United States Treasury Bonds and other financing for example. If the debt ceiling was not raised, all bets are off!

The United States would no longer be viewed by lenders as a secured credit risk and thus demand higher interest rates on their loans. The end result is that your car loan, credit card and mortgage interest rates will increase. Without further elaboration, suffice it to say that your investment portfolio and retirement will be less valued if the debt ceiling isn’t raised. Perhaps now is the time to pay closer attention to the economic risk of a default and its impact on your finances.

THAT’S WHAT’S UP!

Let’s talk about credit card fees. There may be some good news coming to us from the Consumer Financial Protection Bureau (CFB) in the form of its proposal regarding late fees on credit card payments. Currently, a cardholder who pays late can be charged $30 for the first time, and up to $41 for subsequent late payments. Just to remind you, in 2022 credit card institutions collected over $12 Billion in late fee payments. The new proposed law would cap the late payment fee at $8, or no more than 25% of the minimum payment amount due. Now, that’s what’s up!

Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2023. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.

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