What does the government shutdown mean for the average person’s wallet? That is the golden question on the minds of consumers from Washington, D.C. to Washington state and beyond.
“While the federal government shutdown has taken on a circus-like atmosphere, it’s important to remember that this disruption stands to impact more than just our ability to watch the panda cub at the National Zoo or visit Lady Liberty,” said WalletHub CEO Odysseas Papadimitriou. “The shutdown’s economic domino effect also extends far beyond the 800,000 government workers who are now on furlough or are working without pay.”
Below is a breakdown of the major ways in which the federal government turning out its lights will affect your finances as well as additional commentary from WalletHub CEO Odysseas Papadimitriou and 5 Tips for Shutdown-Proofing Your Wallet.
• The Shutdown Will Stunt the Economic Recovery – Economists estimate the shutdown will reduce quarterly GDP growth by 0.15 – 0.20 percentage points per week. A prolonged three-to-four week shutdown could ultimately result in a 1.4 percentage point growth reduction, according to Moody’s Analytics Chief Economist Mark Zandi, thereby curtailing already sluggish end-of-year growth rates by half or more. Slowed economic recovery would result in fewer jobs being added and more uncertainty in the markets, and you don’t need a degree in economics to see how that would hurt everyone’s wallets.
• Federal Loan Assistance Will Be “Frozen” – While the Department of Education estimates the shutdown will have only a limited initial impact on direct federal student loans and Pell grants, Small Business Administration loans and Federal Housing Administration loans won’t be accessible. In the words of President Obama, “Federal loans for rural communities, small business owners, families buying a home will be frozen.”
• Affected Consumers Must Act Quickly to Secure Credit, Short-Term Loans – If you don’t have significant cash reserves and your job has either been put on hold as a direct result of the shutdown or will otherwise be affected by it, it’s important that you take immediate steps to secure credit or a short-term loan. You simply don’t want the government’s shenanigans to trigger a domino effect of damage across your financial life, causing you to miss bill payments, incur credit score damage, or suffer a credit line reduction.
• Looming Default Could Lead to Higher Rates on Credit Cards & Loans – As the federal government approaches the precipice of default, investors will begin asking for higher interest rates on U.S. bonds, which would in turn drive up the rates we’d have to pay on credit cards, mortgages, auto loans, and more.
• The Longer the Shutdown, the Greater the Damage to Your Portfolio – While the S&P 500 was up slightly at the end of the trading day Tuesday and stocks have shown an ability to rebound nicely after previous government shutdowns – stocks lost about 4% of their value during the ’95-’96 shutdown, yet rose more than 10% the month after it ended – the economy is far more fragile now than it was in the past. It’s therefore likely that the longer the shutdown goes on, the more fear and uncertainty will creep into the market. For some, this may present opportunities for value buys, but for many others it will result in nerve-racking reductions in net wealth that jeopardize retirement plans.
• We Still Have to File Taxes, Yet Won’t Receive Tax Refunds – While the more than 12 million Americans who requested a six-month extension to file their tax returns back in April still have to pay up by Oct. 15, the IRS won’t be doling out tax refunds until government is back in business. That’s bad news for folks who were counting on those additional funds, but on the bright side, the IRS is also suspending its auditing process.
“While it may seem like our fate is entirely in the hands of Congress, there are indeed steps that we as consumers can take to prepare for what may come during and after the government shutdown, much like one would batten down the hatches in advance of a hurricane,” according to Papadimitriou. “But mitigating the impact of the shutdown on your finances necessitates planning and financial self-awareness – two areas in which many of us have struggled in recent years. You simply can’t insulate yourself from the vagaries of the current political and economic landscapes with your head buried in the sand.”
5 Tips for Shutdown-Proofing Your Wallet
Even if the government shutdown has not put your job on pause, you can’t assume that you’re immune to its effects. The shutdown is expected to have a far-reaching economic impact, especially if it lasts for weeks rather than days, which means we all will likely be affected in some way, shape, or form. Here are some strategies for preventing the shutdown’s many economic tentacles from stinging your wallet too badly:
1. Maximize Your Emergency Fund: The Great Recession taught us how important it is to have a financial safety net, even in times of prosperity, and the government shutdown will test how much we’ve really learned. In other words, it’s a good idea for those of us who are not currently affected to cut back on spending and contribute as much as possible to a rainy day fund in order to better withstand market volatility and potentially rising costs moving forward. You may not end up needing it, but if you ultimately do, you’ll be glad that you acted proactively.
2. Apply for Additional Credit: It takes a while to get a new credit card, so if you’re worried about your cash flow during the government shutdown, now is the time to apply. The beauty of a line of credit is that it doesn’t cost you anything unless you use it.
3. Open a Dialogue with Monthly Billers: The government shutdown obviously isn’t business as usual, and much like financial institutions were willing to work with customers affected by Hurricane Sandy, many have already announced intentions to be flexible about due dates and finance charges during the unique circumstances we’re currently embroiled in. At the very least, it can’t hurt to ask.
4. Offset Investment Risk: If you’re worried about the fate of your investment portfolio during the shutdown, keep in mind that there are ways to hedge your bets and not only retain your wealth, but perhaps even profit from the turmoil as well. They may include further diversifying your assets, increasing your cash position, or buying stock on weakness in order to garner significant returns if and when depressed sectors ultimately bounce back. But make sure to consult a financial advisor if you have any questions about the best approach for your needs.
5. Fix Variable Rates: It’s possible that credit card and loan rates will rise as we near Oct. 17 – the date by which the government must either extend the debt ceiling or default on its loans. As a result, if you have a lot of debt tied up in variable rate loans and lines of credit, it’s worth looking into the possibility of consolidating as much of it as possible into fixed rate loans in order to garner debt stability amidst market turmoil.