Most people are familiar with the idea that the U.S. government has a certain level of debt that they carry. The popular debt counter can be seen on billboards and websites and shows a number that seems made up. Trillions of dollars of debt are often difficult to wrap your head around, but there is a reason for government debt.

In fact, there is a certain limit of debt the United States Government can have at any given time. This debt limit is termed the debt ceiling. Understanding the debt ceiling is crucial because changes in government debt levels can have effects on your personal finances and financial plan.

What is the Debt Ceiling?

The debt ceiling is the maximum amount of money the United States Government can borrow in total by issuing bonds. The debt ceiling first was introduced by the Second Liberty Bond Act of 1917. It is also referred to as the statutory debt limit or the debt limit.

The main purpose of the debt ceiling is to establish a limit to government bond dispersion as well as set a point at which the Treasury Department should step in and take economic action to reduce the amount of debt. If the national debt levels approach or reach the ceiling, the Treasury Department must take actions to pay government obligations and expenditures until the ceiling is raised.

Over the history of the debt ceiling the amount of debt the government can take on through bonds has been raised or suspended on multiple different occasions to avoid a default. One of the worst possible situations, in economic terms, that could occur in the U.S. economy is a default by the U.S. government on its debts.

Government Debt

Government debt can be understood by thinking of an individual with debts to finance a home, credit card, college tuition, car payment, or any other debt. For the federal government, the expenses they spend on are different and the dollar amounts they work with tend to be much larger than any individual’s finances.

The largest categories of expenses for the federal government include income security such as unemployment compensation, social security, healthcare, national defense, and Medicare which is widely considered to be a category of expense itself.

The comparison between individual debt and federal debt will often cite one major difference that gives the federal government an advantage: taxes. The government has a stream of revenue that is ordered by law which no single individual can attain legally.

Many individuals unfamiliar with the economic workings of the United States do not understand how the government can withstand such a large amount of debt that seemingly will never get paid. Well, that is partly true. A reasonable amount of debt in a stable nation can be managed and continue indefinitely. The overall amount of debt is not typically the best indicator of a debt issue.

Looking at the amount of debt compared to the Gross Domestic Product, or G.D.P., gives better insight into any issues the economy is facing related to debt levels. Since 2013, the U.S. debt has exceeded the yearly G.D.P. leaving experts and individuals alike to be concerned over the current state of debt in the country.

There is no consensus on what the right amount of debt is, but there is agreement that the U.S. debt levels are growing and do not seem to be dissipating any time soon.

How the Debt Ceiling Affects Your Money

Now that you have learned more about the history and nature of the debt ceiling you are probably wondering how this may impact your own personal finances. As debt levels rise in the country the stock market tends to become more volatile. There could also be ramifications across the economy.

The U.S. credit rating would be forced into raising rates on other debts such as auto loans or mortgages to account for added risk. Government spending contributes to the overall wellbeing of the economy.

Overall, tracking the government debt levels and its approach to the debt ceiling can be an indicator of the overall status of the economy. It is also important to note that when the debt ceiling is reached the Treasury Department will begin to take “extraordinary” efforts to reduce the debt and pay back its obligations.

Uncertainty regarding when actions will be taken often lead the market into a volatile state. Politics represents a difficult area to overcome when it comes to the U.S. economy.

Investors operate best when future expectations can be reasonably predicted. When it comes to a debt deal completed by congress, investors can anticipate the market’s reaction. History has proven that the debt ceiling will continue to be raised and the best thing for you to do is focus on managing your long-term financial goals rather than getting caught up in short-term politics playing out in the capital.

What Happens if the U.S. Reaches the Debt Ceiling?

When the debt ceiling is reached, the Treasury Department will resort to extraordinary measures to pay government obligations. Oftentimes the debt ceiling is raised as it approaches the limit. If the U.S. defaults on its obligations, it would lower the credit rating of the country and in turn increase the cost of its debts. If this would occur, the economy would likely go into a recession and would have detrimental effects on the economy.

While the threat of default is often cited by some politicians looking for reform or adjustment, the idea of a default on U.S. obligations is unlikely.

According to the U.S. Department of the Treasury, the debt ceiling has been raised, extended, or revised on 78 different occasions since the year 1960.

Staying Informed

Having knowledge on the certain economic areas such as government debt is helpful when dictating your own financial path. With work, family, and life in general, it can be difficult to stay up to date on all the ins and outs of economic actions, new policies, or areas of concern.

Seeking financial advice can be a great way to make your life easier and give you peace of mind. Having someone dedicated to understanding the markets, tracking changes, strategizing investments, and planning for the future helps simplify your financial path. As such, finding an experienced financial advisor who is dedicated to offering exceptional service and proactive investment management is invaluable. Fragasso Financial Advisors has been providing clients with comprehensive tailored plans for individuals, families, businesses, and non-profit organizations since 1972.

Many individuals remain unaware of the concept of the Debt Ceiling and its implications for their personal finances. With this in mind, Fragasso Financial Advisors’ recently published blog about the Debt Ceiling to educate clients and constituents. Additionally, Fragasso Financial Advisors’ blog provides a detailed look at potential strategies to take if you’re feeling anxious about your debt burden. Don’t miss out on this informative resource – check out Fragasso Financial Advisors’ blog to find answers to many of your questions!

Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.