How to protect your money if the US defaults on its debt

A trader on the floor of the New York Stock Exchange on May 25. AFP

With as little as a week remaining until the US hits its debt ceiling, the once-unthinkable prospect of a historic federal government default is looming uncomfortably large.

The fallout would be huge and would immediately cascade across the global financial system, with stocks expected to crash, interest rates to soar and the US dollar to plummet in value.

Washington has faced many down-to-the-wire debt standoffs in the past and has always resolved them in the nick of time.

But experts say there are some simple steps people can take now to protect themselves just in case disaster strikes.

Borrowing money

If the US defaults, interest rates on its debts will go up. So would costs for borrowers, and quickly. Rates on car loans, mortgages and credit cards would surge.

One way to soften the blow is to reduce your debt if you can. If you have cash available, consider using it to pay off high-interest balances such as credit cards, while leaving enough of a buffer for personal emergencies.

But if you are planning a major purchase such as a new home, it might be worth locking in interest rates now.

US property website Zillow predicts mortgage interest rates could soar to 8.4 per cent if the US defaults, something that would increase mortgage payments by about 20 per cent a month.

Don’t panic or try to time the market

It is an old saying but it has been proven right time and again: “It’s not about timing the market, but about time in the market.”

If you own investments, they will probably take a considerable hit if the US defaults. The White House has warned that the US stock market could lose 45 per cent in value.

While it is always worth diversifying a portfolio to reduce risk, selling all your stocks might not be wise, as you could miss out on any bounce if the US does avoid a default.

Plus historically, the market has always come back after disastrous events such as the 2008 financial crisis and the Covid-19 pandemic.

Experts advise a portfolio with high-quality investments, not risky ones prone to volatile fluctuation.

In uncertain times, a lot of investors look to gold as a hedge against a default. It is a safe haven and its price generally holds up even during financial shocks. Nice, if you can afford it.

Nothing lasts forever

Financial events always present an opportunity for us to rethink our personal and financial goals.

When do we want to retire? How will we get there? How much money should we have in investments to realise that dream?

Remember, even if the most dire consequences of a default start to appear, US politicians will be working to fix it as quickly as they can.

The US economy is resilient overall, and a return to normality should see a rapid improvement of America’s – and the world’s – financial fortunes.