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The U.S. debt ceiling deadline is quickly approaching.
President Joe Biden and House Speaker Kevin McCarthy on Sunday evening reached a deal to avoid default, but members of Congress still need to vote on the measure.
How will it impact your personal finances if the U.S. government can’t pay its bills?
“If they actually default, that’s catastrophic," says personal finance columnist Michelle Singletary. "The markets will respond. People may actually not get a check.”
Today, On Point: Answers to your personal finance questions as the debt ceiling deadline looms.
Michelle Singletary, Personal finance columnist for the Washington Post. Author of What to Do with Your Money When Crisis Hits: A Survival Guide. Her column “The Color of Money” is syndicated in newspapers across the country.
PRESIDENT BIDEN [Tape]: We've got good news. ... I just spoke with Speaker McCarthy, and we've reached a bipartisan budget agreement that we're ready to move to the full Congress.
MEGHNA CHAKRABARTI: Much to the relief of the entire world, watching as the United States stands near inches from the cliff edge of historic default. President Biden announced over the weekend that he and House Speaker Kevin McCarthy have come to an agreement on a deal to raise the debt ceiling.
BIDEN [Tape]: Takes the threat of catastrophic default off the table, protects our hard earned and historic economic recovery. And the agreement also represents a compromise, which means no one got everything they want. But that's the responsibility of governing.
CHAKRABARTI: If the deal passes Congress and that's still an if, because Republican hardliner Representative Chip Roy of Texas called the deal a, quote, turd sandwich. And Congressional Progressive Caucus Chair Representative Pramila Jayapal of Washington objected to the fact that the Biden administration even allowed the GOP to use a potential default as leverage in the first place. So, if the deal passes Congress, the agreement would most immediately suspend the debt ceiling until January 2025.
So what did the threat of crashing the American economy actually yield? What's in the deal? Well, there are some clawbacks of IRS funding and unspent COVID relief funds. There are new requirements for some food aid. Also, non-defense discretionary spending will be flat next year, which means that funding for domestic programs across the board, except Social Security and Medicare will stay the same next year. They will rise by 1% in 2025.
The caps are a major Republican priority. The deal also sets six years of appropriations targets. However, those targets are not enforceable. Not everyone has to belt tighten, though. There's no rollback on tax cuts for the richest Americans or corporations. Meanwhile, the deal would also raise the defense budget to $886 billion next year. So, all in all, it means that total government spending over the next several years, after all of this debt ceiling wrangling, is likely to be nearly exactly what it is today.
So, Michelle, first of all, I know that government budgeting isn't like a family's budget because, of course, the government can print its own money. But Michelle, humor me for just a minute here for a second, okay? Because if a family came to you right, and said, Michelle, we need to control our spending, we've got a brand-new budget for the next couple of years, and here's our plan.
We're going to spend the same money on food, the same amount of money on food. Inflation be darned. Okay, we're not increasing our budget for food, but we're also, because we need it, we're going to buy that brand new top of the line 2025 SUV that we've always wanted. Would you say, oh, bravo, American family X, you've done well. You have mastered the art of budgeting.
MICHELLE SINGLETARY: Yeah, I would not, of course. And, you know, there is a lot of comparison to what's happening to the federal government to personal budgets. But we do need to make the distinction. They are different. And there are some things that the government is responsible for, and should be responsible for, to help families stay above the poverty line or not sink below it. With the family, of course, you don't buy that SUV.
Of course, you cut out things that are not necessary. But even with the family, there are things you just can't cut. The cost of the roof over your head and the food on your table. And so that's why a lot of families are struggling, because they can't cut that. And then they end up cutting things like maybe instead of three meals a day they have two, or they send their kids to school hungry. And so while we do need to chastise the government for its overspending, we have to understand it. In a lot of ways, they're doing the same thing that many families find themselves in the position of doing, which is trying to make do with what they have.
CHAKRABARTI: Well, of course, everyone knows Michelle Singletary because we lovingly call her one of our Money Ladies. Most often she appears with Rana Foroohar on this on our show. Michelle's also the nationally syndicated personal finance columnist for The Washington Post. ... So, Michelle, it's really great to have you back on the show. And, you know, there I was trying to throw you a softball about our chance to be cynical about politicians and you had to make it all real and serious on me.
SINGLETARY: I know, right? You know, it's so funny because people say that all the time. And, you know, I've been writing about the debt ceiling. And people will say, the government, they must cut. Except when you really ask them, but don't cut me. Don't cut the stuff that I like. And that is why we've got where we are. Certainly, we need to have a balanced budget, just because we can't keep issuing debt to pay our bills.
But right now, you know, just after a horrific time for personal health and wealth, being the pandemic, this is not the time to say, you know, those poor people over there, they don't need any more food. We need to cut that or other programs like that. We must be more generous to people who are just surviving and perhaps look at other places where we can cut.
CHAKRABARTI: Okay. So let's just talk a little bit about some of the proposals that are in the 99-page deal here with, you know, the big asterisks that, as I mentioned earlier, there's some noise coming from both hardliners on the right and the Progressive Caucus on the left. So this isn't a done deal by any measure just yet.
But what do you think of some of the changes that we see here, for example, changes in SNAP, right, the supplementary nutrition program. So for folks between the ages of 50 to 54, and I believe these would be particularly people who do not have children, there would be new work requirements added to their SNAP eligibility that they would have to work 20 hours a week to receive aid.
SINGLETARY: You know, on paper, these kinds of proposals always make sense to the number crunchers, right? Well, they're a healthy adult. They should be working. But, you know, if you've ever worked with the poor, it's much more complicated than that. And I will have to say, to characterize people as if they're lazy and they just want to, you know, suck off the teat of the government. Is it correct?
Because a lot of times people aren't working for a number of reasons, like in that age group, perhaps they're taking care of their elderly parents. There are a lot of home caregivers who chose to stay out of the workforce so they can take care of their elderly parents who don't have long term care insurance or benefits, perhaps there's some mental health issues. There [are] some health issues.
You know, maybe they live in a rural area where they can't get to a job. Sure, there are a lot of jobs out there, but do you want to be 50 or 54 trying to work in a restaurant bussing tables? I mean, you got to look at the totality of what's going on. And I have never met, and I work in our communities. I have been doing this for a long time. I have a ministry at my church.
So I'm working with people that they're talking about. And not a single person has ever said to me, I don't want to work. I just want to get money from the government, not a single person. There are reasons why they're not working. And this is where we want to draw the line, to not give people money so that they can have food on their table? That is the line when we know that doing the 2017 tax cuts, we gave tax cuts to the wealthiest of Americans, the wealthiest corporations, they get a break. But a person who's 50, who may be taking care of their parents at home can't have enough money to put food on their table, that's the lie.
CHAKRABARTI: ... I'm seeing here numbers from the Census Bureau itself. This is from the American Community Survey. They published some results back in 2020. And they found this is from the Census Bureau, that more than three quarters of families, so these are at least multi-person households, three quarters of families receiving SNAP benefits had already at least one person working, and two thirds of those families already had two or more workers.
So, like, I'm just not sure how many working, you know, able bodied aged 50 to 54 single Americans receiving SNAP out there we're talking about even, in terms of who aren't working right now. So I'm not sure how effective the notion is even going to be.
SINGLETARY: It's not effective. And what ends up happening is if those, you know, folks that too fall into this category, they end up going to food pantries, they end up going hungry. And that's really what ends up happening. It doesn't, it's not effective. And even, you know, when we looked at Welfare-to-Work, that sort of push for even single mothers who are at home, or single dads at home, we found that a lot of reasons why they weren't working, you know why? Because they couldn't afford child care.
And so you're saying, yes, go out and get that job making minimum wage and all of that wage is going to go to take care of that kid that you have to put in daycare. And I already know people are forming their tweets and their emails saying, well, they shouldn't have had the kids in the first place. You know what? That is too late to have that argument. The kids are here. The parents are here. Let's figure out how to help them and give them a lift up so that they can provide for themselves.
CHAKRABARTI: And this number of how many people are already working while receiving SNAP benefits, it's pretty consistent. There's another study I'm seeing from the Center for Budget Policy and Priorities, and they found the same number. Three quarters of adults who participate in SNAP are typically already working. I mean, so what does this tell you overall ... about the financial situation of America's working poor. I mean, what left do they have to give in order to help the federal government be more responsible with its budget?
SINGLETARY: They don't have much left. They don't. And a lot of them are working jobs. They're working at jobs, paying low wages, long hours, and a lot of their money, they're not wasting their money. A lot of their money goes to also housing. So what goes hand in hand to the food crisis is the housing crisis. And that is what's happening. And these types of cuts don't help them.
CHAKRABARTI: We're talking about what's in the debt ceiling deal that was struck this weekend between President Joe Biden and House Speaker Kevin McCarthy. Again, with the caveat, the asterisks that it still has to make its way through Congress. So, Michelle, as you know, the United States has never defaulted before.
So we wanted to just go back in time a little bit and remind ourselves of what this history is that led us to this point, because the national debt increased under every presidential administration since Herbert Hoover. And in the 20th century, the debt ceiling was raised at least 90 times under various administrations. But, of course, as you know, that does not mean that politicians haven't flirted with disaster before. The last time was just a dozen years ago.
NEWS BRIEF [Tape]: In the final days before a deadline to raise the nation's debt ceiling, many Americans wonder if there's any way to prepare for a possible default.
CHAKRABARTI: That was 2011. And the circumstances then were also similar to what we're seeing today. The Republican Party had won the House in January of that year, and they used raising the debt ceiling as a bargaining chip for spending cuts.
JOHN BOEHNER [Tape]: President Obama came to Congress in January and requested business as usual. He had another routine increase in the national debt. But we in the House said, not so fast. Here was a president asking for the largest debt increase in American history, on the heels of the largest spending binge in American history.
BARACK OBAMA [Tape]: Right now, the House of Representatives is still trying to pass a bill that a majority of Republicans and Democrats in the Senate have already said they won't vote for. It's a plan that would force us to relive this crisis in just a few short months, holding our economy captive to Washington politics once again.
CHAKRABARTI: President Barack Obama and then House Speaker Republican John Boehner there. On July 31st, just two days before the so-called X date, President Obama announced that the leaders in both congressional chambers agreed on a deal. Over the next two days, the House and Senate voted to swiftly pass the Budget Control Act of 2011, which raised the debt ceiling by more than $900 billion. But the story didn't end there.
NEWS BRIEF [Tape]: For the first time in the history of the ratings, Standard and Poor's downgraded the United States credit rating late Friday. The agency said it is cutting the country's top triple-A rating by one notch to Double-A plus.
CHAKRABARTI: That announcement came on August 5th, just three days after President Obama signed the Budget Control Act of 2011. Standard and Poor said, quote:
'The downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.'
They went on to say:
'We have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.'
NEWS BRIEF [Tape]: Before the weekend, no one knew what a downgrade would mean. Now we know all too well. A day of sheer panic on Wall Street. The global sell off started in Asia. Tokyo down 2%. The selling increased, London down 3%. And finally, the massive tsunami of selling hit New York. The Dow down almost 6% at the closing bell. The worst day for the stock market since the height of the financial crisis, capping a run of two weeks, raising almost $2 trillion in stock market wealth. The average American 401K investor losing more than $16,000.
CHAKRABARTI: In fact, between July 21st and August 5th, 2011, the S&P 500 lost almost 10%. And when you compare the peak and floor of that year from April 29th to October 3rd, the S&P dropped by 19.4%. Now, the market did recover during the fourth quarter, jumping about 15% then. But 2011 taught us that even without government default, the economic anxiety caused by the political divides and political gridlock can have a direct impact on the market. Now, Michelle, you've actually written about this. So tell me, I mean, do you see parallels between 2011 and today?
SINGLETARY: Oh, absolutely. Same problems, same political drama. You know ... bringing us to the brink does not help calm people down. In fact, as we saw with the stock market, it panicked people and it panicked the global markets. And really, we need to understand this should be two different discussions. The debt ceiling, you know, and I'm not a debt person. So you speaking to someone who hates debt. But you know but that's one conversation. And the budget should be happening when we join the budget negotiations.
What we're talking about right now is paying for bills that we have already obligated ourselves for. So that's like you're saying I owe you $100, but, you know, in a couple must ask me, negotiate the fact that I owe you $100. You know, no, we should be having that conversation at the beginning, before I gave you that $100. And so that's why the markets are saying, Wait, wait a minute, you guys are mixing these things up. And what ends up happening is that it helps regular people, people who have money in their retirement account.
Now, if you've got years to go, this will shake itself out and it'll even out. But if you're close to retirement or about to retire, like my husband, you know, this is a terrifying time because this is the money that you're going to live on in retirement and you're seeing these idiots negotiate these things. As if we are not real people and there are real consequences for taking us to the brink of default.
CHAKRABARTI: Well, I mean, when you wrote about the market impacts, you cited some Gallup data that 43% of Americans are doubtful that they're going to have a comfortable retirement. So these are real concerns for a vast number of people.
SINGLETARY: Yeah. And so it's 43% of non-retirement. Now, here's the interesting thing about that study. But it also showed that more than ... 77% of retirees say they are actually living comfortably. So there's a disconnect between the reality and people's fears. But here's why fear can change things, because if those 43% of people say, I'm not going to have a comfortable retirement, it makes no difference whether I save for retirement or not, even though it does.
And so fear keeps people out of the market. Fear makes to make changes to their retirement account that is going to help them down the road. So we knew the one, for example, during the Great Depression and other times like during 2011, people pulled money out of the market. It's like, I can't take all of this up and down, and they often don't get back in. And so they don't benefit for when the market historically lifts.
And that is my concern, that it will scare people out of the market. It will scare people to pull money out of the retirement when they should leave it alone. Now, if you're in retirement or near retirement, you need to have some money to live while these things shake out. So you're not going to lose all of that money. So you need to leave it alone, except for the portion that you need right now. And you may take a hit, but that's okay, because you do need that money to run your household. But again, you know, the fear factor will have people making choices that have a long-term detrimental impact on their ability to live comfortably in retirement.
Well, in fact, on this question of what to do with retirement funds during this period of political or fiscal volatility, that's what I'm going to call it, political fiscal volatility. We got a call from On Point listener Tom who listens to the show from Winston-Salem, North Carolina. Actually, he left us a message on the VoxPop app. And Tom asks, what effect will not raising the debt ceiling have on investing for retirement?
TOM: If Congress fails to raise the debt ceiling, will individual taxpayers be able to purchase government bonds? Will my Vanguard Retirement Fund be able to invest new fund contributions into U.S. government bonds? Or will those contributions just sit in the fund as cash until this crisis is over?
CHAKRABARTI: Michelle, do you do you have a guess on that?
SINGLETARY: ... So people have been asking me about, not just the government bonds, well, government bonds, but savings bonds, things like that. You'll still be able to, I believe, buy the bonds. And see, that's what I'm saying. So there was a reader who said, well, should I cash out my savings bonds? No. You don't cash out your savings bonds. Yes. You should still buy government bonds. They're still the safest investment that you can. Because we will get through this even if there is a default.
My prediction, it won't be very long and not even saying it's going to happen anyway. But if it does, because things will be so horrific that hopefully, and I need to watch my language. ... Those folks up there in Washington who are disconnected from the rest of us will hopefully sit down and come up with something that will end it soon. So I would say, no, don't fear doing what you would normally do in terms of having bonds as part of your investment portfolio.
CHAKRABARTI: But, you know, over the past several years, I think I've used the language confusing economy or economy that doesn't make sense. Or, you know, even what you just said about disconnect. Because as you wrote in your column, Michelle, I'm just going to quote you because it's pretty smart. You say,
'Yes, the government spends more than it takes in. Yes, we need deficit reduction, but at what cost to the financially fragile and people trying to glide into retirement with some assurance that their investments won't be derailed by political grandstanding. And then you say:
'This should be a period of relief. Inflation is coming down, unemployment is low, and workplace retirement accounts have seen a decent surge in recent months.' Should be a period of relief. I mean, are people feeling that way?
SINGLETARY: Absolutely. I hear from them. I put a shout out to my readers and people were saying, you know, I'm scared. Am I going to get my Social Security checks? Should I invest? Should I cash out of my savings bonds? I mean, my savings bonds. I've had people ask me, should I pull money out of the bank? Where would you put it, honey? No. And so this is a real fear. And think about this ... especially for those near retirement. In retirement. If you're not going to continue to work, this is all the money you have left. And you can understand why people are scared.
And I feel like all this political brinkmanship doesn't take that into account. And look at even the deal. The deal doesn't really even move the needle. In fact, in a couple of places, particularly as it relates to the food benefits for folks and also pulling back money from the IRS, that is the most idiotic move. I mean, think about it. That's like decimating your sales force if you're a business. Because you know what? Because the IRS collects the vast majority of money that runs the government. Why, for goodness sakes, would you cut their budget and that, you know, 10 billion or whatever they're going to cut, you know, is going to improving their technology, hiring more people to help taxpayers and going after people who are tax cheats, which brings in money to the government. Tell me how that makes sense.
CHAKRABARTI: I mean, I think the answer is in your question, right, in terms of political goals here. But you're right. I mean, the deal takes $10 billion from the IRS for the fiscal 2024 and then another $10 billion for fiscal 2025. And this is from, I think there was an $80 billion overall IRS funding for the next ten years that was in the Inflation Reduction Act to do exactly what you're saying, to go after tax cheats and modernize the IRS. But I mean, I suppose the thinking there is that what we've heard from Republican lawmakers, that they feel that the IRS is unfairly going after people for political reasons. Michelle, I mean, that's one of the justifications that's been offered several times.
SINGLETARY: Yeah. And we've debunked that time and time again. The Washington Post has great fact checkers. And we've debunked that time and time again. The majority of the money is going to be used to upgrade their systems. The majority of that money is going to be used to hire people to work on your tax returns to help make sure that they get done and processed fast.
And if you have an issue that you can talk to a human being, the majority of those funds are going to be going after people who should be paying their taxes and not just, you know, regular people. We're talking, you know, people who owe, you know, thousands and thousands and thousands of lots of businesses and things like that. It's not going to be some taxman knocking on your door and taking your furniture. That is not what's going to happen.
And anybody who's ever had an interaction with the IRS ... in the last how many years and I have, it's extremely frustrating. The system is I mean, it's oh, my goodness. It's like having a deck player in your car, you know, tracking your car version of a system. And, you know, I talked to folks at the IRS all the time. I talked to the people who work there, and they are overworked. They're overtaxed, pun intended. And so that's what the money's for. And, you know, listen, I understand that we have, you know, political differences and philosophical differences. But some of the things that are going on right now being pushed by the Republicans is not in the interests of regular Americans. It's in the interests of them keeping their seat and their lobbyists happy.
CHAKRABARTI: You know, Michelle ... the most important thing that we haven't touched upon yet is what is not in the deal. Okay. Because if we're really talking about, and I know how much you hate debt. Right. But if we're really talking about getting a hold of government spending and having a balanced budget, not that it's required of the federal government, I just want to say that over and over again, it is not required of the federal government. It's required of the states to have balanced budgets.
But the federal government, it's not, you know, an absolute requirement. Nevertheless, it has been done and we can do it. But the biggest drivers of federal spending, Michelle, are not part of this deal at all. Social Security, Medicare, not part of the deal at all. People don't like those programs to be cut or reduced or modified. And as I mentioned earlier, the Defense Department, without even asking, gets an increase in its budget for next year. So, I mean, if the United States is going to do anything to balance or reduce federal spending, how can it do it without touching those three things in particular?
SINGLETARY: Well, I can't speak a lot to the defense budget, and nor would I want to. I don't follow those numbers enough to offer an opinion that would be worthwhile other than to say obviously we need a strong defense, particularly as it relates to what's happening in the world. And I'm thinking Ukraine. But when it comes to Social Security and Medicare, of course we need to look at how those programs are run, not necessarily Social Security, but definitely Medicare. I mean, we need to do a better job of making sure that we are, you know, that the health care costs are in line so that if there is some cuts, that won't affect the beneficiaries, that we make those cuts. I mean, you know, drug costs, I mean, there's a lot of things that we can do that is not directly related to those programs, but things that increase the cost of those programs.
CHAKRABARTI: We asked Michelle to come back on the show today to really help us connect all the talks that have been going on in Washington over raising the debt ceiling and the deal that has been recently hammered out, though, yet to pass Congress. And how what's in that deal may affect individual Americans. So, Michelle, let's talk a little bit about student loans, right?
Because for the past several years, due to the pandemic, the Biden administration had suspended student loan payments. That's going to come back at the end of this summer. The administration already announced that. But the debt ceiling deal does nothing to change that. So people are going to have to start repaying their student loans after a really long pause. So tell me what you think about that.
SINGLETARY: I think it's going to be a financial shock for quite a few people. I think there was a percentage of people who were smart. They either took the money that they would have been making and saved it. And to anticipate perhaps getting some sort of debt relief, but if not, then they can then put it on their loans. Or they used the money to pay down other higher expensive debt. Or they continue to make their loan payments so that they could have, you know, interest free loans for now more than three years.
CHAKRABARTI: That was me. I was like, I'm not stopping this.
SINGLETARY: Exactly. And then there's a lot of people who just incorporated that money in their lifestyle. They didn't sort of think that this gravy train was going to be gone, you know, sooner than later. And it's those folks that I worry about. Because they've now grown accustomed to not making those payments. And then when they restart, it's going to be a shock to them in their budget. And I worry about them. Because then what they'll do is put it in deferral, or some sort of forbearance. And when you do that and it's not subsidized by the government, then the interest is packed on to the interest. And so then you're paying interest on interest.
And that's how someone who starts out with $20,000 in student loan debt, next thing you know, they owe $50,000. And I've met folks like that. I counsel people like that. They had the student loan debt, and they started their families, their life, and they put it on forbearance or deferral. And, you know, a debt that started off like $50,000 is now like $170,000 or $200,000 because they spent a decade that pain on this debt.
And the fact is you're going to be in repayment by the end of the summer. So you need to start now making those payments to yourself and putting them in a savings account or go ahead and put them on the loan so that you can still take advantage of a couple more months of not having any interest.
CHAKRABARTI: You know, it occurred to me that I might have come off as sounding a little smug when I was like, I just kept repaying my three years. Didn't mean to be smug because I also want to acknowledge that I was lucky. I mean, I kept my job during this whole time. And many, many Americans did not have that luxury. So I want to acknowledge that.
And then also, you know, when I started having to repay my student loans, it was a long time ago and interest rates were a lot lower, and I got locked in at a really low rate. So those are my qualifiers there. I didn't want to sound smug. But ... to your point, I was like, wow, Well, I'm just paying off the principal here now, so I might as well just keep doing it. But so what you're advising people, because this is coming in just a few months, is right now just start putting money away in order to absorb the shock that's going to come. Is that what you said?
SINGLETARY: Absolutely. And I didn't think you sounded smug, by the way. I think you sounded smart. And it's okay to say, I smartly did this. But yes, I believe that you should start paying those loans now if they are coming due. Because a couple of things will happen. So now let's see how it works in your budget. If you're in that group that just ignored it and said, you know, I'm going to enjoy this when I have it. So practice it now. See how it impacts your budget. It'll give you a couple of months to figure out how you're going to do it. What are the changes you need to make instead of waiting till it happens? So perhaps you incorporated new expenses in your budget that you now have to cut. Perhaps you're in a situation where you need to change your housing, maybe your lease is coming due, and you can't pay that rent or that mortgage with this student loan debt, as well.
And so now you're going to have to figure out something different. You know, my ministry, we're working with a couple ... they drink our Kool aid because we teach them how to get out of debt and their monthly payments are going to be like $1,300. Because they spent so much time just sort of letting the debt roll. And so now they're making a lot of changes, cutting stuff that, you know, one of ... the spouse[s] is getting another job and they're doing it now, even before those payments start. So that they're in position to restart those payments and it won't devastate them.
CHAKRABARTI: You know, you're making a really important point, Michelle, because this is all coming as we've seeing higher inflation than before the pandemic. Rising food costs, rising housing costs. And so to add back on the student loan repayments that people are going to have to do is going to be tough. So on that point, we actually got a listener who wants to talk about housing. This is John from Los Angeles, California. And John left us a message again on that VoxPop app. And he asks, What could this moment mean for the cost of housing?
JOHN: I live in a big city and the rents here are already ridiculously high. I'd like to know if failing to raise the debt ceiling will impact the cost of housing and make it even higher.
CHAKRABARTI: And Michelle, do you see a relationship there?
SINGLETARY: There could be a relationship, yes. Particularly if some of those landlords have variable rate mortgages on those properties. The costs could go up. Now, the Fed has been fighting inflation and so they've been raising the interest rates. If they see that inflation has stalled and the downward push has stalled, they're going to have another rate increase. And then if you've got variable debt, either a variable rate mortgage ... or you're trying to get a new mortgage or you are using your credit line, it's going to cost you more.
And guess what they do? They pass that on to renters and consumers. So, yes, it absolutely could impact that. And say they have money in the market and they're using some of that money and the market tanks, then that can impact you. Because when one part of someone's portfolio or finances impact, then they look at other places where they can raise money. And guess what that might mean raising rates.
CHAKRABARTI: Okay. Well, you know, Michelle, what I'm wondering about overall is, you know, again, we are having this conversation as a deal has been hashed out between President Biden and House Speaker Kevin McCarthy. But who knows what's going to happen in Congress? My days of betting on political stability are long, long over. So what should people be doing right now? First of all, is it wise to just continue to prepare as if a deal may not be reached or passed in Congress? And B, if so, what? How should people be preparing?
SINGLETARY: I think you should prepare as if a deal won't be done because this Congress is crazy. And, you know, there are people who are so disconnected, as I said before, from regular people, that they will take us to default and be damned otherwise. ... And so here's the thing. And this is how I run my finances personally, anyway. I always run as if we are in a recession, because that way you're always in battle mode, not out of fear, but just out of caution.
And so right now, I would be curbing any unnecessary phrase. If you've got a major project that is not a necessity, put it on hold, because you might need that cash. There could be job losses. If the market tanks, it could be catastrophic. So you want to make sure that you got a good cash cushion if the worst happens. And the other thing I would do is check in with your parents or older relatives who might be relying on Social Security. You know, I believe that everybody is going to get their money eventually.
But if the worst happens, we've never been here before. But if the worst happens, checks could be paused, and you've got to check in with them to see how will they handle that? Are they in need? And be prepared to help them or other people in your family that might be in that same situation. Contact your lenders. The moment anything happens that may impact your ability to pay your mortgage, or your car note or even your credit cards. Contact your lenders. Many people never make that call to say, I'm in trouble. And so you want to be prepared to do that psychologically and just do it. Let them know you're in trouble.
CHAKRABARTI: Can I just jump in here on the lender? Because that is one where I think people may come to the table and be like, Well, I don't think that the bank or the credit card companies are going to do anything, so why bother? So when you contact your lender, you get on the phone with them and you have to go through the phone tree to find a human, presuming it's a human ... but you find a human. What specifically do you tell them? When you say contact, what should you say?
SINGLETARY: That's actually a great question. So you say, listen, I'm in jeopardy of losing my job or I've lost my job or they cut my hours. I cannot make this payment this month. What can you do for me? And oftentimes, what they'll either say is, okay, you can skip this month or let's put you on a payment plan, or let's pause the interest that is accumulating there. All kinds of things that they can do, and they have done during the pandemic.
... When I went to the site for my mortgage, right up there, sort of like bread boxes, like if you're in trouble, call us and we will work with you. And they did it during the Great Recession. Sometimes they have to be made to do it, but a lot of times they do it on their own. And the same thing with your mortgage. And if you're renting, tell your landlord, hey, this is happening. I'm not saying you're going to get a positive reaction every single time, but everybody I counseled to do that got help. And so you just tell them the situation. Be honest.
Don't promise what you can't. If you've lost your job, you got no money in the bank, say that. And say, listen, I'm doing the best I can to get a job. I'm going to contact family members. ... Can you give me a month or two, a break until I get myself situated? And at least you open the line of communication. And what it also does is it may pause them taking legal action against you, give you a little bit of, you know, reprieve until something happens. But you should just call and be honest about your situation.
CHAKRABARTI: Okay, great. And you've also said that in times where a lot of consumers are being are feeling the impact of decisions in Washington, those are times where banks are more likely to be to be willing to help. And that could be coming. Now, you were going to say something about one of your other recommendations of how to prepare now, and that's about saving, and saving and investing. Because in your column, you quote Moody's Analytics and their report this month where they say even without the specter of a debt limit breach, many CEOs and economists still believe a recession is dead ahead.
SINGLETARY: Yeah, we were already possibly on that road, if we're not already on that road. But you know, any push towards a default or taking us right up to the 11th hour could push us right there. The very thing that we're trying to avoid, they will make happen and they will make it happen unnecessarily so. And I am so angry because we already have people worried. We already have high inflation. We already have people barely being able to afford their rent or mortgage.
And here you are making this decision based on debts that we're already obligated to pay. This is not new debt, y'all. And so that angers me because I work with these real people. I know what they're going through ... and they shouldn't be doing this right now. And so your brain, people's brains, will want to flee and shut down. They won't want to keep their money in the stock market, and that in the long term will hurt them.
And so what I try to tell people is, and I try not to say don't panic, that it's just a worthless phrase because why wouldn't you pay it? But don't act on that. Don't pull your money out, don't pull all of your money out. Put out what you need, but don't pull it all out and continue to save. And Fidelity Investments, which is one of the largest providers of workplace class, looks at retirement savings habits and analyzes the data. And actually, 401K millionaires grew the last three months. And so that's saying that these folks who have worked on average 28 years putting into their 401k are millionaires because they didn't panic during these types of times.
So take a lesson from them, which is why I continue to report on that. It's a small portion ... 1% or less, but they show us the pathway to that millionaire status. When times like this happen, even the most horrific times, like possibly pushed to listen to fault, they stay steady and that's how they become wealthy. And so that's the lesson that I'm telling you all. ... Don't panic, but don't act on that panic. This is what I was trying to say. So, you know, feel what you need to feel. Scream if you need to scream, but don't act on that and that is how you'll get through this.
CHAKRABARTI: Yeah, it's interesting about those million-dollar 401Ks. ... But in all honesty, maybe it's because I'm still quite a ways away from retirement, given the way the economy's going and costs and stuff, it doesn't feel like enough or a lot. Do you know what I mean?
SINGLETARY: Yeah, I do. I do. I mean, to your point, when you look at it, you have to look at the fact that you do, you know, maybe on paper you're a millionaire. But when you take into account taxes. But it's still more than most people have.
CHAKRABARTI: Oh, yeah, a lot.
SINGLETARY: I mean, the average balance is like, what, under $200,000? And so you've got to sort of appreciate yourself and pat yourself on the back. If you are in that position where you have that kind of money in your retirement account. My grandmother retired, or Social Security, a very small pension and $20,000 in the bank.
And when she died, she had $20,000 in the bank. And so it's possible to live on that million dollars. And so if you were in that category or getting close to it, rest assured that with other things, like with your Social Security payments and having your house paid off before you retire, you can live a comfortable retirement.
CHAKRABARTI: The key there is ... because you hate all debt ... pay off all your debt.
SINGLETARY: Pay off all your debt, don't be like the government.
Washington Post: "Debt ceiling fallout puts U.S. credit rating in limbo" — "I wanted Republicans to back off and allow the debt ceiling to be raised so we can breathe, especially all those Americans who have sacrificed to invest in retirement accounts."
This program aired on May 30, 2023.