Money Management

Your five-minute guide to the debt ceiling debate. 

The United States officially hit its debt ceiling on Thursday, Jan. 19, according to a letter from Treasury Secretary Janet Yellen. That means it has reached the $31.4 trillion limit agreed in December 2021 and will now have to rely on “extraordinary measures” to meet its obligations.

Yellen is asking lawmakers to increase the amount the U.S. can borrow. “Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans, and global financial stability,” she warned.

But what is a debt ceiling? What happens now? And will any of it have an impact on your finances?

What is the debt ceiling?

The debt ceiling or debt limit is the amount of money the U.S. government is allowed to borrow to cover its costs. It’s a bit like the limit on your credit card. It is set by Congress and was first put in place in 1917. That money gets used for various things, including Social Security payments and federal workers’ salaries.

The government spends more than it brings in each year and the amount the country owes has been creeping up for some time. According to Fiscal Data, created by the U.S. Treasury, the federal debt has increased from $408 billion in 1922 to $30.93 trillion in 2022. Increasing the debt limit doesn’t authorize additional spending. Rather, it allows the government to borrow to pay for spending that’s already been agreed upon.

The country has reached the limit on what it can borrow and the clock is ticking. But we haven’t reached the edge of the cliff yet. Yellen’s letter marked the start of a debate that could continue for several months. The Treasury has some tricks up its sleeve, such as stopping certain investments and moving money around to keep things running for now. The New York Times estimates the crunch point will come around June, which gives lawmakers in Washington a few months to find a solution.

A change to the debt limit needs to be passed by both the House and the Senate. Without getting into the politics, raising the debt limit no longer happens as a matter of course. Some politicians want to put conditions, such as spending cuts, on any increase. Others feel the consequences of not raising the ceiling are so serious that it shouldn’t be up for negotiation. There’s never been a situation where the government can’t meet its obligations because the limit has always been increased. All the same, you can expect the topic to dominate the headlines for a while yet.

How could the debt ceiling impact your money?

It is extremely unlikely the government will fail to raise the debt ceiling, even if the debate continues right up until the last minute. Nobody knows exactly what will happen, but part of the reason it’s such an improbable scenario is that the consequences would be dire.

Here are some of the ways a failure to increase the debt ceiling could impact your finances.

1. Delays to paychecks and Social Security payments

If the Treasury runs out of ways to move money around and the debt ceiling has not been increased, it would have to pause some of its obligations. According to the Committee for a Responsible Federal Budget, these include Social Security payments, salaries for federal employees, military salaries, and veterans benefits, amongst other things.

2. The U.S. might default on its debt

If the U.S. defaults on its debt, the Washington Post reported that it could have a significant impact on the job market and Americans’ abilities to build wealth. Quoting Moody’s Analytics, it said a default could “cost the U.S. economy up to 6 million jobs, wipe out as much as $15 trillion in household wealth, and send the unemployment rate surging to roughly 9 percent from around 5 percent.”

Moreover, there are consequences to even the possibility that it might default. For example, in 2011, when negotiations to raise the debt ceiling almost reached a standoff, Standard & Poor’s downgraded the U.S. credit rating for the first time ever. A lack of confidence in America’s ability to pay its bills could result in higher interest rates for borrowers, which would impact people’s mortgage loans, car loans, and credit cards.

Finally, it could have a negative impact on stock market investments, albeit a short term one. Reuters reports Goldman Sachs analysis showing the S&P 500 fell 15% during the 2011 showdown. It warns an actual default would “send shockwaves through global financial markets.”

How you can prepare

If you’re worried about even the slight possibility that Washington might fail to raise the debt limit, there are a couple of ways you can prepare. One is to put some extra cash into your emergency fund in case payments get delayed or the economic instability leads to job losses. The usual recommendation is to have three to six months’ worth of living expenses in a savings account to tide you over. But the debt ceiling debate combined with warnings of a potential recession mean you might want to have more in the bank.

If you are planning to buy a house or take on a fixed-rate loan in the near future, know that there’s a small chance rates will increase. That said, don’t rush into a decision. Interest rates have already risen dramatically in recent months and we don’t know what 2023 will bring. On the other hand, if you carry high-interest credit card debt, the more debt you can pay down, the better. It isn’t easy, but if we enter difficult economic waters, that debt could weigh you down and make it harder to stay afloat.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.

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When an industry grows as rapidly as short-term rentals, it’s no surprise there are growing pains. 

Airbnb is the leader in short-term housing rentals. And back in 2008, when the company first got off the ground, it was all rainbows and unicorns. If city leaders were concerned about what would happen if the industry grew too large, they didn’t complain. After all, short-term rentals give tourists a place to stay when they visit a new city.

The rumbling of concern did not become loud enough to be picked up by the media for several years. By 2016, cities across the globe were actively looking for ways to rein in short-term rentals. The problems were plentiful — from a lack of safety and security regulations to local residents angry that their neighborhoods have been turned into quasi-hotel districts.

If you’re an Airbnb host who counts on short-term rentals to supplement your income, you may find yourself caught up in the new laws impacting hosts worldwide.

A growing concern

Apart from issues of taxation, noise, and safety regulations, cities are concerned with the number of housing units purchased by individuals and investment firms for use as short-term rentals.

To put this in perspective, Airbnb hosts now manage over 6 million listings in more than 100,000 cities across the globe, and purchases are not poised to slow. In 2020 alone, the sale of vacation homes grew by 44% year-over-year, and real estate investment firms across the U.S. have plans to spend billions of dollars on additional holdings.

If you own an Airbnb rental unit in a city facing dangerously low housing inventory and sky-high rents, you may find yourself dealing with an entirely new set of rental laws or unable to rent it out at all. Here’s a sample of the cities cracking down on Airbnb practices:

New York CityParisBerlinBarcelonaSanta MonicaCharleston, SCSan FranciscoLos AngelesLas Vegas

Whether managing your Airbnb property represents a full-time job or a side hustle, it may be a good idea to make contingency plans for the day the local government in your area enforces new laws.

Contingency options

If things are currently sailing along for you and hosting an Airbnb means more money in your bank account, change can be a tough pill to swallow. However, having a plan in your back pocket just might cut down on the level of stress you experience.

1. Keep your ear to the ground

Don’t wait for new rules, regulations, or laws to surprise you. Let’s say you own an Airbnb near Lake Placid. No matter where you live full time, keep up with what’s going on in city council meetings. Follow any updates regarding short-term rentals.

The idea is to stay ahead of issues so they don’t catch you off guard. For example, if your rental currently has three smoke detectors and the city calls for four, add that fourth one before you’re told to.

2. Comply with new rules and regulations

It’s possible to stay in compliance, even if you don’t like the changes laid out by the local government. While it may feel intrusive to be presented with a laundry list of things that must change, there’s no reason to fight the inevitable. Make it easy on yourself by doing what’s asked of you.

The good news? Business-related expenses can typically be written off on taxes.

3. Sell the property while the market is hot

Although the market has cooled a bit due to rising interest rates, it’s still a good time to make a profit. If you have an attractive property in a nice area, consider listing it for sale. If new rules make it difficult or impossible for you to continue using the property as an Airbnb, selling while prices remain high may make the most sense.

The current issue appears to be a conflict between the rights of business owners and the needs of local residents. While there aren’t necessarily any good guys or bad guys here, there will be a need on all parts to compromise.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Citigroup is an advertising partner of The Ascent, a Motley Fool company. Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Could a run of bad weather upend your finances? 

People in certain parts of the U.S. can get through winter without so much as seeing a snowflake. But in other parts of the country, winter storms can be a regular, unwanted occurrence.

Not only can these storms be inconvenient (think having to take time out of your workday to dig out your car), but in many cases, they can also be costly. Here are some of the ways you might lose money due to a winter storm — and how to prevent that from happening.

1. Lost work time

If a winter storm makes your local roads inaccessible, then you may have no choice but to stay home from work for a day or more. But if you don’t have the type of job that can be done from home, then missing work time could mean losing out on pay. And if you already live paycheck to paycheck with no money in your savings account, that’s a problem.

Meanwhile, let’s say you do work from home. If a winter storm knocks out the power, you may not be able to get much, or anything, done. And if you’re self-employed, that could also mean a temporary but meaningful loss of income.

That’s why it’s important to do what you can to build an emergency fund. That could help make missing income easier to deal with.

And if you’re self-employed, build some downtime into your schedule so a day or two of missed work won’t throw your finances for a loop. At the same time, be mindful of the deadlines you commit to during the winter if you live somewhere that’s susceptible to harsh weather. You don’t want to end up alienating clients due to storm-related interruptions.

2. Spoiled food

Winter storms can result in power outages. And that, in turn, could mean having to throw away the contents of your freezer and fridge.

Now, the answer here isn’t to never buy perishable food — that’s not reasonable. But it could pay to invest in a portable generator that allows you to keep your fridge running when the power goes out. That way, you can avoid having to dump its contents.

Of course, you’ll need to be careful when using a portable generator. That means making sure it has a way to vent exhaust and being cautious about extension cords.

3. Higher utility bills

You may feel the need to crank up the heat when there’s a winter storm howling outside. But that could result in higher utility bills. And that’s something you’ll want to budget for.

You can also talk to your utility provider about getting on a payment plan that allows you to spread your payments out more evenly during the year. That way, instead of paying $200 a month in the spring and $800 a month in the winter, you might pay something in the middle every month of the year.

Winter storms can be more than just a hassle — they can cause you to take a financial hit. It’s important to prepare for that and do what you can to minimize your losses.

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Once finished, you won’t be able to tell the difference between a modular home and a site-built house. 

The Washington Post reports that the U.S. would need an estimated 3.8 million housing units to deal with the current housing shortage. One possible solution is to embrace the manufacturing of modular homes.

What is a modular home?

A modular home, sometimes called a “prefabricated home,” is built in a factory. When it’s about 80% to 90% complete, it is transported to a building site where a crane operator sets each piece on its permanent foundation. Once built, a modular home is indistinguishable from a traditional stick-built home.

Modular homes are not to be confused with mobile homes. Modular homes are built to the same local, state, and regional building codes as a home stick-built on site. They are permanently affixed to a foundation and constructed to last for generations. This is different from a mobile home, which can be picked up and transported from one lot to another.

At one time, modular homes were known solely for being a cheap and fast way to build a house. While building a modular home still takes less time and money, today’s modular homes offer advantages not found in most traditionally-built homes. At issue is how difficult it can be to shake a bad reputation, even when it no longer applies.

Is a modular home inferior to a stick-built house?

If your stick-built house were constructed inside a weather-controlled factory under strict conditions and transported to your building site, it would be considered a modular home.

Builders use all the same materials as a stick-built house to construct a modular home. Traditional and modular homes have identical building codes, and both are built to last.

Here are three ways stick-built and modular homes are different:

Traditional homes are built on-site and modular homes are primarily constructed in a factory.Critical elements of a modular home, like plumbing and HVAC, undergo quality control testing before leaving the factory.Due to the number of quality control measures a modular home must pass through before leaving the factory, there is far less risk of hidden cost-cutting measures.

Advantages of modular homes

As the modular home industry has grown and refined its processes, modular homes have some advantages over most stick-built homes. For example:

Depending on the finishes chosen by the home buyer, a typical modular home costs 10% to 20% less to build than a stick-built home. This may help home buyers afford a bit more home than they would otherwise qualify for.Most mortgage lenders treat modular homes the same as they treat site-built homes.Not only are modular homes inspected on-site by local inspectors before move-in day, but they are also routinely inspected throughout the building process.A modular home can be built at the factory in four to eight weeks, far less time than it takes to build a traditional home.Modular homes are typically built to be more energy efficient than stick-built homes, saving the homeowner money on utility bills.

A FEMA study also showed modular homes are better equipped to withstand wind than site-built homes.

Conclusion

Manufacturing family homes at a lower cost and in less time may be the ideal way to fill the housing gap in the near future. To do so, however, the building industry must help consumers overcome their preconceived notions about modular homes.

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It’s a practice I’m more than okay with. 

I don’t happen to have a Trader Joe’s supermarket in close proximity to my home. Rather, the nearest one is a good 30-minute drive away. That’s why I only tend to visit Trader Joe’s once a month — I don’t have the time in my schedule to go food shopping so far away on a weekly basis.

When I do pay a visit to Trader Joe’s, it’s often to stock up on items I can only find there — things like a specific type of veggie burger and the crackers I find myself snacking on frequently between meals. And I try to set a budget when shopping at Trader Joe’s so I don’t wind up with an excessively large credit card tab.

But it never fails. Pretty much every time I set foot in Trader Joe’s, I wind up making an unplanned purchase. That’s not a problem, though. In fact, it’s something I’m fine with.

When you actually plan for the unplanned

One of the great things about Trader Joe’s is that it tends to introduce new products on a rotating or seasonal basis. Sometimes, those new products stick around for the long haul. Other times, you’ll find them for a number of weeks before they disappear off of shelves for the rest of the year or, in some cases, forever.

But either way, since Trader Joe’s is constantly unveiling new items, I often find myself scooping up products I didn’t know existed. Only those purchases don’t put me in a financial bind, because I actually plan for them.

I know full well that I’m going to be tempted to try out new products at Trader Joe’s. So I work those impulse purchases into my grocery budget. What I’ll do is limit the non-essential grocery purchases I make at other stores so I have more room in my budget for “fun food purchases” at stores like Trader Joe’s and Costco (which also sometimes surprises me with new products on its shelves, especially during the holidays).

It’s all about enjoying the experience

Shopping at my main supermarket isn’t really all that fun. I tend to run in, scoop up a bunch of essentials, and get out. And while my Costco runs tend to be more entertaining (due to the “what will they introduce this week?” factor), even those can get a little monotonous, since I tend to mostly stick to the same list of milk, fruits, and vegetables.

But shopping at Trader Joe’s is a different experience — and one I look forward to every month. That’s why it makes sense for me to carve out room in my budget for impulse buys. The snacks and pantry items I bring home from Trader Joe’s make me happy and, frankly, make it so I’m not munching on the same old goodies night after night.

Granted, I’m not the type of person to complain about eating peanut butter cups 46 nights in a row. But if I can mix things up with some Trader Joe’s almond butter cups, why not?

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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