How to Survive Debt Ceiling FalloutBy: Bill Rice
While politicians dance on the edge of the cliff, get your personal finances ready for anything.
The economics and politics of the most recent financial crisis - hitting the financial debt ceiling - will make your head hurt. However, following a few simple steps can bulletproof your personal finances from significant debt ceiling fallout:
1. Stash Some Extra Cash.
Make little changes that will net you an extra $20, $50 or $100. Start small and add a cushion to your savings account. One trick that works well is to pay yourself first by automatically moving $25 from your checking to your savings account each payday.
Other small cutbacks that can also add up fast to give you cash reserves:
- Brew your morning coffee at home and avoid the expensive stuff.
- Swap a trip to the mall for a walk through your local park.
- Skip eating out. Cook at home and take leftovers for lunch.
2. Sell or Return What You're Not Using.
Take a quick look around your home. Things gathering dust, stashed in corners and long forgotten about can be instant cash. You'll be amazed at how much spare cash is cluttering your home or apartment.
The Internet is full of easy ways to sell dust-catchers to you, but treasures to others. Here are few examples that might yield you little extra cash:
- Old books: Load titles onto Amazon and people will be sending you cash in no time.
- Collectibles: That "priceless" Wee Forest Folks collection on eBay could be fast cash.
- New antiques: A film SLR camera or Apple II might be hot collectors items on eBay.
3. Prepare a Spending Plan
When the economy or your job looks a little unsteady, an immediate spending diet is in order. Review all your spending from the past two months - checkbook register, credit card statements, and online banking. Then, take a red pen and start marking off things you can do without for a couple of months. Make reasonable cuts to everyday expenses. Avoid starving yourself of all spending. Otherwise, just like a crash diet, you'll rebound with gluttony.
Stick to this plan faithfully for the next two months. And train yourself to think: if it doesn't make the spending plan, put your wallet and credit card away.
4. Check on Mortgage Rates
If you have a home loan or are thinking about buying a new home, the decisions you make in the next couple of months can save you hundreds of dollars a month.
The debt ceiling compromise will impact mortgage rates. If the debt ceiling is raised, federal spending cuts and possible tax increases will be programmed into the legislative compromise. Cuts to federal programs may impact you and as a taxpayer, you are eventually on the hook for this debt increase.
Even worse, if the deadline is missed (maybe even before), Treasury rates will be in for a shock as foreign US debt holders sell off. This will pull mortgage rates upward; many experts are estimating nearly 1 percent, literally overnight. If you have a home loan, make sure you have locked in your lowest rate.
If you are thinking about buying a new home, get pre-approved now before the market moves. It takes all of 15 minutes.
5. Check Your Credit Score
Watching and improving your credit is always a good idea. It means you will be able to get home loans, auto loans, and credit cards even in the worse economic climates. If you haven't checked your credit report and score lately, now would be a smart time.
The debt-ceiling crisis illustrates several important principles of debt management and the advantage of having an excellent credit rating. Here's the short version of these lessons:
- If you rely on credit as a primary source of spending, debt will catch up with you.
- If you do get into a credit crunch, excellent credit can help in the pinch.
- If you have high debt, you can only get out if spending cuts are part of the solution.
Checking your credit report and improving your credit score should be a regular part of your personal financial planning.
6. Stay Your Investment Course
Just like checking in with your home loan expert, you should also make a call to your financial adviser. Is your portfolio or savings plan positioned for safety and steady long-term growth?
Chances are your best bet is to stay the course. Making radical changes during financial market turmoil often hurts your long-term goals.
BONUS: Don't Panic!
Despite all the political positioning and economic doomsayers, most believe that there is too much at stake for politicians to allow the U.S. to go into default and have their excellent credit rating downgraded. That means the deadline will most likely end in political compromise - giving the federal government room to borrow, but including federal spending cuts and maybe tax increases.
There are lots of lessons here from Uncle Sam. Most importantly is that debt is dangerous, good credit is a safety net, and controlling spending is the solution to healthy finances.
All of this financial hoopla makes it a perfect time to get your own finances in tip-top shape; because, even when the federal government raises the debt ceiling (most probable result), there will be consequences, including potential tax hikes, mortgage rate increases, and tighter credit guidelines making it difficult to get loans and credit cards without good credit.
Follow the six steps above and you will be ready to weather the worst of the debt ceiling fallout.
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