Fidelity’s Jurrien Timmer and Ashley Tran discuss the latest debt ceiling developments, why it has the potential to disrupt financial markets, and how it could potentially impact investors. They explain what could happen if the U.S. defaults on debt and the various scenarios that could play out if Congress does not raise the debt ceiling, as well as the importance of sticking to a financial plan.

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The United States is currently facing another debt ceiling showdown. The debt ceiling is the maximum amount of money that the government is authorized to borrow to pay for its obligations, such as Social Security, Medicare, and military salaries. It is different from the annual budget, which sets how much money the government will spend on various programs and services.

The government reached its current debt ceiling in March 2023, and the Treasury Department has been using “extraordinary measures” to pay the bills without exceeding the limit. However, those measures will run out soon, and if the debt ceiling is not raised, the government will run out of money to pay its bills, leading to a potential default on its debt.

The debt ceiling showdown is not only a political issue but also a financial one that can affect individuals. A potential government default can lead to a significant decrease in the value of the dollar, which can cause inflation and higher interest rates. This can impact mortgages, credit cards, and other loans and affect the overall economy.

So, what can individuals do to prepare for a debt ceiling showdown? Here are a few tips:

1. Review your budget: Start by reviewing your monthly expenses and make adjustments if necessary. Cut down unnecessary expenses and prioritize essential bills such as mortgage, rent, and utilities.

2. Build an emergency fund: Having an emergency fund can help you prepare for unexpected events such as a potential government default. Aim for at least six months’ worth of living expenses saved up in an emergency fund.

3. Consider your investments: A potential government default can cause a significant market upheaval, affecting stocks, bonds, and other investments. Talk to a financial advisor to see if your portfolio is diversified enough to withstand market volatility.

4. Stay informed: Keep up with the news and developments surrounding the debt ceiling showdown, as it can impact all aspects of your finances. Knowing what’s happening can help you make informed decisions about your money.

In conclusion, the debt ceiling showdown is a complex issue that can have far-reaching effects on individuals’ finances. By reviewing your budget, building an emergency fund, considering your investments, and staying informed, you can prepare yourself for potential market volatility. Remember to consult with a financial advisor if you have any questions or concerns.