What Financial Headlines Mean for You
This week could trigger two of the most consequential financial events to impact in your finances for the foreseeable future. With the U.S Government set to run out of money by October 31, 2021 and the debt ceiling needing to be raised, it’s like we’re facing a category three storm, and a possible earthquake. While one may view it as politics as usual, in this economic conflict, there will be no innocent economic casualties if immediate resolutions are not forth-coming. So what does it means for you?
Two Problems
I think it is always useful to at least have a basic understanding of a problem in order to figure out your present position, options and next move. So here we are a few days away from a potential government shutdown and a decision regarding raising the debt ceiling.
Potential Shutdown
In simple terms, a government shutdown means that the federal government lacks the money to pay its monthly obligations. It is almost the same as you or I not being able to pay our personal monthly operational expenses such as mortgage, rent, car note or groceries. So, what does the government do? The same things that you and I do when we are unable to meet our financial obligation—rob Peter to pay Paul! In other words, the government picks winners and losers.
Of the expenses I previously cited in this example, if you ran short on money, would you pay your car note over purchasing groceries and go hungry? Probably not! Therefore, the dealer suffers until you have the money to catch up on your payments for another month or two. Well, the government is no different, and it chooses whether to pay social security or soldiers in the military. And that’s the reality of a shutdown!
Potential Increase of the Debt Ceiling
The debt ceiling, on the other hand, is the 8.0 or higher earthquake. The consequence would be devastating and its impact felt for many years to come. Simply put, in order for the government to meet its monthly obligation, it borrows money. Why? Because the government is not generating or collecting enough in revenue to meets its monthly or annual obligations.
In our personal finances, we imitate government-like behavior when we are unable to meet our obligations, deciding instead to put it on a credit card. What’s wrong with that ? One answer is, there may be nothing wrong with that option, if it’s an emergency. If you’re purchasing some appreciable asset, credit may also be a good option to use then. However, in a government-like way, when our credit cards carry charges for non-emergency essentials, rather than pay the debt off immediately, we end up paying higher interest rate.
Unlike the government, fortunately, we can’t increase our borrowing limits annually, each time we max out on our credit cards which could turn out to be total disaster. Even if we could increase our limits, a reality check should remind us that one day the bill will become due. Hopefully, you now have a basic understanding of the problems facing our economy this week.
Personal Impact
If you rely on federal government funding, income or money to pay your monthly bills, then you already know. With a few days to go before a potential shutdown takes effect, can your finances to sustain such an event?
Can you manage a few weeks without pay or are you living paycheck to paycheck? It’s going to interfere with your Christmas shopping, but is Santa your priority? Did you save anything as the economy was moving towards getting back to normal? It means that child tax credits, small business and government contractors won’t get paid on time. The point is to think ahead about what short term adjustments you can make if this event becomes your reality.
The government shutdown might be the lesser of the two events which may occur this week. The real problem will be if the debt ceiling is not raised. In somewhat non-economic terms, the debt ceiling is tied to what is referred to as U.S. Treasury Notes or Bonds. Ok, bonds are essentially, a piece of paper assigned a value and interest rate the federal government gives you in exchange for you lending them or investing a certain amount of money with the government, for a specific period of time. In simple terms, it’s time, interest, value and money.
Most of your personal bills are tied to those government bond interest rates. What do I mean? Again in English, it means that as the bond rates change, your car note interest rate could change. If the government does not raise the debt ceiling, you know that amount we talked about on their credit card? Well, lenders or people who want to purchase government bonds will demand a higher interest rate in exchange for their investment. In demanding a higher interest rate, they are saying that they are not sure the government bonds are as reliable as we think or can be trusted and so they want more for their money.
Contingency Planning
Now that you know your bills are tied to this complicated economic back story, it means that if the debt ceiling is not raised, or raised late, interest rates on your credit card may increase; your car note payments will increase and your mortgage interest rates may increase. I get it!
So you already have a house and locked into your mortgage. Fantastic! But not raising the debt ceiling, could result in you losing some home equity value. The selling price of homes would decrease and the mortgage interest rate for new home buyers would increase, causing fewer people to qualify for new homes.
And I don’t need to remind you that inflation is here and prices are increasing daily! What’s your game plan? If you don’t have one, get one! If you fail to plan, you plan to fail. This is not a situation which calls for panic, but is one that requires awareness of what’s taking place around you. What contingencies are you going to put in place, or have in place?
What’s Up!
I have decided to add a new section to Money Monday’s called “ what’s up!” Basically, it is something very important I think you should know and may be unrelated to the main article. Today’s what’s up is about FAFSA ( Federal Application for Federal Student Aid). The school year 2022- 2023 Free Application for Federal Student Aid opens up on Friday October 1st, 2021. While you can wait until June 2022 to apply for federal assistance; it would not be wise to pursue that course of action since some states and schools award money on a first-come, first-served basis, or have deadlines earlier than the federal deadline. Get ahead of the competition-apply on Friday! And 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 2021. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.
