5 actions employees should take in case of debt default

By Scot Herrick | Cube Rules Commentary

Jul 25

The traditional media is finally catching up to what a lot of us have seen for a while: There is a very good possibility that the United States will default on its debt on August 2nd by not raising the debt ceiling. The impact of that, according to pundits, is anything from “nothing” to the end of the financial world, putting us back into a recession or depression. Worse than the one we haven’t got out of yet…

Even if you live outside the United States (and thanks for reading Cube Rules), a US default will have significant impacts across the planet’s financial systems.

As employees working in cubes, should we just throw our hands up in despair and whine about Washington and politics? Well, you can, but there are some concrete actions you can take now if a default happens.

1. Lock down any floating interest rates

Floating interest rates are often tied to the cost of Treasury bills — and that rate will most likely go up in case of a default. Whether it is a variable rate loan, credit card, home mortgage or other financial instrument, the time to lock this down at current rates is now. I locked rates on a home loan this past Friday in case a default occurs.

2. Consider going to 100% cash in your IRA or 401(k)

There is more than chatter on financial sites that a default would cause all sorts of drops in stocks (the stock market, because of those great corporate earnings that have not translated into jobs, is close to a 3-year high). Why take a 20% haircut on your savings by holding on to your positions and hoping the market comes back soon? Instead, you can go to cash now and then reinvest when you can see past the crisis. You can move all your holdings in 401(k)’s and IRA’s into cash without taking money out of the account.

I’m not a financial advisor, but this seems a logical move. Right now, I have zero exposure to stocks in my retirement accounts with the majority of my savings in…cash…until I can see past a crisis.

3. Review how long your job will last

I advocate that every job will end; the only question is when. Either you’ll get sick of doing your job or your company won’t see the need for the work you do. I advocate figuring out how long you think the job will last and then to check the decision at least once a quarter — or when circumstances change.

Well, a default is a change in circumstances. Instead of reviewing how your company is doing quarterly, it’s time to look at your situation weekly until the crisis is resolved and management can see the way again. Given the job market — and a default, it may not make sense to necessarily change companies or get a new job. But it sure makes sense to have your eyes and ears wide open so you are not surprised.

4. Don’t take on more debt

If some of the worse events happen because of a default, lots of layoffs will occur. Now is not the time to be adding thousands of dollars to a credit card — especially if there is any variable rates. Besides, after savings and a long layoff, you may need some of that available credit.

5. Make sure to fund your emergency fund

Not much you can do in a week, of course. But your emergency fund (I advocate one year’s take home pay, but at least 3-months worth is needed) needs funding. If the economy takes a shock, credit won’t be available to use and layoffs will happen. Your emergency fund is what keeps the wolves at bay.

Pundits will claim that default is unthinkable — and it is. But that’s not reality. Reality is that there are Wall Street traders looking at the crazy people in Washington and taking out Credit Default Swaps — yeah, the same ones that brought down the banks with sub-prime mortgages — betting that the US will default because of what they perceive. We’ll see how the negotiations go in Washington. But, trust me, if a default happens, it will impact either in your job or your family life.

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About the Author

Scot Herrick is the author of “I’ve Landed My Dream Job–Now What???” and owner of Cube Rules, LLC. Scot has a long history of management and individual contribution in multiple Fortune 100 corporations.