As of Oct. 8, 2019, the U.S. Treasury reported that the total outstanding U.S. national debt stood at more than $22.8 trillion — up from “only” $20.4 billion a year earlier. The Congressional Budget Office projects that the debt will jump to $28.5 trillion by the end of 2029.
While these are all certainly staggering numbers by any measure, what do they really mean? How is the typical American worker — who earns an annual mean wage of $51,960, according to the U.S. Bureau of Labor Statistics — supposed to relate to a current national debt figure in the double-digit trillions of dollars?
The truth is that while the national debt is to some degree an unfathomable number, the ramifications of the debt have real-world consequences, even for average Americans. While some of the scenarios about how the national debt can affect your wallet on a daily basis might be speculative, anything is possible if borrowing continues to accelerate in the future, so you’ll want to prepare your finances now for the unknown.
Last updated: Oct. 17, 2019
It can be hard to predict when the federal government will decide it’s time to get the national debt under control and start paying it down. But when it does, it will need to generate revenue to make those payments. One of the ways the government can generate revenue is by raising taxes.
At some point, this course of action seems likely. The passage of the Tax Cuts and Jobs Act in 2017 cut taxes for many Americans. In an environment with already-low tax rates and a growing national debt, the scales seem tilted toward a tax hike rather than an additional tax cut. Plus, provisions related to individual income tax rates in the Tax Cuts and Jobs Act are already set to expire naturally at the end of 2025, meaning that even if Congress doesn’t go out of their way to raise taxes, this will automatically happen of its own accord in 2025.
What You Can Do About Higher Taxes
When the tax man comes, the only thing to do is to use the tax laws to your advantage. When it comes to savings, this means using tax-advantaged accounts. While putting money into a traditional IRA is always a good idea if you can benefit from the tax deduction on your contributions, sometimes a Roth IRA contribution makes more sense in the long run. For example, with current tax rates so low — and likely heading higher in the future — it might be better to forgo making a tax-advantaged contribution to a traditional IRA now and instead benefit from the tax-free withdrawals from a Roth IRA in the future.
Higher Interest Rates on Bonds and Savings Accounts
Not everything about a rising national debt is necessarily bad for consumers. Over time, a rising national debt can result in higher interest rates. For example, when consumers get saddled with too much debt, they must pay a higher interest rate if they seek additional loans. So too with the U.S. government. This can be a boon for some investors. If the government pays higher interest rates on its debt instruments, like U.S. Treasury bills, investors benefit by earning more when they buy government securities.
What You Can Do About Rising Interest Rates on Investments
The key as an investor when interest rates are rising is to remain in short-term securities that can be reinvested at higher rates. For example, U.S. Treasury bills are short-term investments that mature in one year or less. Treasury bills can be bought with maturities as short as four weeks. If rates go higher, you’ll be able to reinvest your maturing Treasury bills into higher-paying investments.
Higher Interest Rates on Credit Cards and Other Loans
Although higher interest rates can result in you earning more interest, they also mean you might pay more interest on any outstanding debt you have. This is particularly true when it comes to variable rate debt, such as on a credit card. Credit card interest rates typically rise point for point with market interest rates, meaning your unpaid credit cards will cost you more every month. If you’re out looking for a new fixed-rate loan, you’ll see that rates have ticked up there as well.
What You Can Do About Rising Interest Rates on Credit Cards and Other Loans
If you’ve never followed the maxim that you should pay off all your credit card debt as soon as possible, now would be the time. Rising credit card interest rates will make it harder to pay off your debt, as the interest piles up and begins compounding. If you absolutely need a loan, try to lock in the lowest rate you can find for the longest term possible so you’re protected from rising rates in the marketplace.
Reduced Social Security Benefits
Just like with a family budget, when the government is overextended with debt it has to cut back on some of its capital expenditures if it wants to pay that debt down. One of the biggest payouts from the U.S. government comes in the form of Social Security benefits. For years, projections have indicated that the Social Security fund will be exhausted by 2035, meaning that payout reductions have always been a possibility. With a ballooning national debt, those payout reductions might become even more likely.
What You Can Do About Reduced Social Security Benefits
Short of voting for candidates who pledge to shore up the Social Security system, there’s little you as an individual can do to stop reductions in Social Security payouts. However, there are steps you can take to soften the blow if reductions are coming. Maximizing your earnings will help increase your lifetime benefit, so one option is to get a side gig to bring in more money. Delaying your benefits until at least full retirement age or later can also up your lifetime payout. As of 2019, the full retirement age for Social Security purposes was 67 for those born in 1960 or later. Delaying your benefits until age 70 will increase them even further.
Potential Lower Stock Market Returns
The stock market might seem like it has a mind of its own, but valuations in the market depend to a large degree on outside economic forces. When interest rates rise, it’s often a negative for the market for a few reasons.
First, higher rates mean that the companies in the stock market have to pay more in interest expense, which could reduce their earnings. As earnings are one of the primary drivers of stock market prices, lower earnings often translate into lower stock prices.
Also, higher rates on other investments such as bonds, savings accounts and CDs provide competition for investment dollars that might otherwise go into the stock market. In any given year, the stock market might be up or down in value by 10% or more, with prices changing constantly and sometimes dramatically. But if investors can earn, say, 6% on a totally risk-free CD instead of a stock, many will prefer that choice.
In these two ways, higher rates can hurt stock market valuations.
What You Can Do About Lower Stock Market Returns
Although you can’t control the stock market, you can adapt to a rising-interest-rate environment. According to modern portfolio theory, you should be in a diversified portfolio regardless of the investment environment. If you find yourself currently overweighted in stocks, there is no better time than the present to revisit your asset allocation and make sure you’re properly diversified. On the stock side, companies that pay higher dividends often prove more attractive in a rising-rate environment. On the bond side, shorter-term investments, or those with rate-adjustment features, can help defend against rising interest rates.
Drag on Economic Growth
Higher rates are often a drag on U.S. economic growth because they translate into higher costs for companies that need to borrow to finance their growth — a common strategy for most companies. Higher costs and lower profits mean slower economic growth for the nation as a whole. If conditions are severe enough, this can result in an economic recession. In a recession, many companies have to lay off workers to cut costs, and this can fuel a vicious cycle of higher unemployment and lower consumer spending, which further dampens economic growth.
What You Can Do About Sluggish Economic Growth
If U.S. economic growth begins to drag and we head toward recession, you’ll have to hunker down a bit to get through to the other side. First, do everything you can to make yourself indispensable at work. If your company needs to start laying off workers, you want to be one of the employees that the company considers vital and among the last to go.
On the financial side, start building up your emergency fund in case the worst happens and you find yourself looking for another job. You might want to reduce the risk profile of your investments as well since an economic recession also tends to drag down market valuations with it.
A rising national debt often leads the U.S. government to weaken the dollar as a means of reducing the cost of its debt. When the value of the dollar falls, the government can pay back the debt with cheaper dollars. A falling dollar also makes U.S. exports more attractive to overseas buyers. That’s because the currencies of foreign countries typically rise when the dollar falls, meaning overseas buyers can purchase more goods for the same amount of foreign currency. This brings more foreign money into the U.S. economy, helping to stave off economic declines.
What You Can Do About a Weaker Dollar
The strength or weakness of the U.S. dollar is another macroeconomic event that individual citizens have little control over. However, if the dollar does fall, there are ways you can protect your investments — mainly by focusing on portfolio diversification.
When the dollar falls, investments denominated in other countries become more valuable on a relative basis. So, consider adding foreign-denominated bonds and stocks to your portfolio. Another asset that does well when the dollar falls is gold, so you might consider owning gold or other precious metals in your account. Of course, if you have a diversified portfolio to begin with — which most financial advisors recommend — you should already have an allocation to foreign investments and precious metals. Take this opportunity to revisit your asset allocation and make sure you have the right balance.
Falling Home Prices
A rising national debt can lead to higher market interest rates, including for home mortgages. Since the cost of a home mortgage is an extremely important variable in the affordability of a home, higher mortgage rates typically slow the growth of new home purchases, as homes begin to seem too expensive. At some point, higher mortgage rates also make renting seem like a more attractive option. In addition, higher market rates and a rising national debt are often accompanied by a slowing economy and rising unemployment — a combination that makes it less likely that consumers will be out buying new homes. All of these factors contribute to reduced demand for new homes, which ultimately drives housing prices lower.
What You Can Do About Falling Home Prices
If you already own a home it’s not usually recommended that you sell it just because you anticipate a decline in its value. While you certainly could, you’ll be giving up an important asset based on your best guess about an uncertain future. The good news is that if you plan to keep your house for the rest of your life, a falling home price isn’t that important to your pocketbook since it doesn’t affect your day-to-day cash flow.
Falling home prices can be a good thing if you’re currently a renter or otherwise out of the real estate market. Although a higher-priced mortgage will cost you more in monthly payments, if you can wait until prices take a significant dip, you might be able to buy in at a price that can lead to a good long-term profit.
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US Loses Monetary Power
The combination of factors accompanying the rising national debt can all conspire to reduce American monetary power in the world. A rising debt load makes it seem less likely that the U.S. government will be able to afford its obligations, diminishing its financial reputation. Increasing inflation, a falling dollar, a slowing economy and rising interest rates can all weaken the standing of the U.S. in the global financial ecosystem.
What You Can Do About the US Losing Monetary Power
Again, as an individual citizen, there’s little you can do to boost America’s monetary power. However, you can hunker down a bit if the process begins. Think about all of the elements that go into the reduced monetary power of the U.S., including a slowing economy, rising inflation and falling dollar. At times like these, you’ll have to protect your finances. Make sure you are diversified, keep your investments short-term in nature and do all you can to solidify your work situation, perhaps even taking on a side gig or additional duties at your main job. Remember that periods of economic uncertainty have always resolved themselves over time, leading to new periods of growth.
Inflation Ticks Higher
When the national debt rises and the value of the dollar falls, it tends to be in conjunction with inflation. As inflation ticks higher, the money you have buys less than it did before. When the cost of everyday life increases, it has the same effect as if money was taken directly out of your pocket.
What You Can Do When Inflation Ticks Higher
Inflation is a fact of life. Think back to when you were growing up. How much did a loaf of bread cost back then? How about a gallon of gas? Or a meal at your local diner? Undoubtedly, you remember all of these costs being much lower. That’s the effect of inflation.
Over time, the effects of inflation are manageable as wages often go up to offset at least a portion of these cost increases. However, if inflation spikes due to rising national debt problems, you might have to make lifestyle changes. For example, you might consider shopping at lower-cost grocers and retailers to avoid paying top dollar for your basic necessities, or eating at home more often to save money. On the investment side of things, consider buying inflation-adjusted bonds that pay a higher rate tied to the rise in the inflation rate.
The Fed Could Print More Money
This is an unlikely scenario, but one that theoretically could happen. It’s also a scenario that points out one of the immense differences between the U.S. government and the average taxpayer. If you fall deep into debt, you must somehow earn additional money to pay it off unless you choose to declare bankruptcy. When the U.S. government falls into debt, it can simply print more money to pay off its obligations. It’s really that simple: The government just turns on the spigot and out pops more money. Even so, this is very unlikely to happen for a number of reasons. The most compelling one is that it would trigger runaway inflation. In economic parlance, this is known as “too much money chasing too few goods,” or “demand-pull” inflation. By any name, it almost guarantees a highly inflationary environment, which is bad for the economy.
What You Can Do If the Fed Prints More Money
Again, the Fed printing more money to pay off the national debt is highly unlikely. On the off chance that it were to occur, however, you’d have to plan around it just as you would in any other high-inflation environment. Protect your cash as much as you can, preferably by keeping it in savings accounts that can adjust their interest rates upwards as inflation surges. As this scenario would likely bring numerous economic problems along with it, you’d want to build up your emergency fund as well, secure your job as much as possible and adjust your investment portfolio so it’s less risky.
Spending On Other Essential Services Goes Down
Although the U.S. government’s budget is different than your own personal household budget, the overarching principles are still the same. Since printing additional money could lead to fiscal disaster, the government, at least theoretically, has a limited amount of money to spend. As more of that money goes toward paying interest on the national debt, less money is available for essential government services like transportation, infrastructure and social welfare programs. If the national debt continues to increase, and interest payments continue to rise, funding for other programs might suffer as a result.
What You Can Do If the Government Reduces Spending On Other Services
To some degree, you just have to bite the bullet if and when the government reduces spending on services. If your Social Security benefits get cut, for example, or the highway near your house doesn’t get needed repairs, you can’t directly influence that. The best you can do is to build up your emergency reserves to cover things such as income shortfalls from reduced Social Security benefits or car repairs from poor road conditions. The more you can be self-sufficient and not rely on government programs, the less likely you are to be impacted.
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About the Author
After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.