How Is the Increasing Federal Deficit Impacting Your Personal Finances? - Slimmer Payments

How Is the Increasing Federal Deficit Impacting Your Personal Finances?

Mike F. Strong

The federal debt is huge and growing. If you are wondering, “what does that have to do with my personal finances,” the answer is – a lot!

The federal deficit was exceptionally large even before the pandemic. But, to provide COVID-19 relief, the federal government has been forced to incur massive new amounts of debt.

Right now, the country owes over four times more than it did in 2000. The national debt then stood at around $5 trillion.

The federal deficit is the difference between the flow of government spending and the flow of government revenues — mainly taxes. When the coronavirus pandemic hit in early 2020, the government ordered a lockdown of much of the economy. Congress responded with substantial spending to ease the pain. The combination of the deep recession (which automatically leads to less tax revenue and more spending on programs like Medicaid and food stamps) and the spending Congress appropriated in response to the pandemic, increased the deficit significantly.

What does the federal deficit mean for your money?

While such a large deficit sounds scary, it really isn’t. In fact, in a way, it is kind of a good thing. When the deficit is huge, and the economy is in a recession — like now — interest rates are exceptionally low. That goes for the federal government – who can continue to borrow on the world stage to make up for shortfalls – and for taxpayers. With low interest rates, it becomes relatively easy to take out loans for starting a business or buying a house. Historically low interest rates also mean that there are refinancing opportunities for mortgages, student loans, and other personal debt.

Deficit spending also impacts where and how you should invest your money. To operate under a deficit, the Treasury Department has to issue treasury bills, treasury notes and treasury bonds to make up the difference. By issuing these types of securities, the federal government can acquire the cash it needs to provide governmental services. These bonds are attractive as part of your long-term investment strategy, as they are very safe and secure. However, during times like these, when interest rates are held low, the yield on such bonds is also very low.

Investors typically hold a mix of stocks and bonds, with the general intention that bonds will reduce portfolio volatility and improve returns. With yields expected to remain low for quite some time, investors need to consider alternative investments that provide the safety and security of government bonds but pay higher yields.  In the financial environment we’re now in, bank deposit accounts can serve much the same purpose as bonds. And equally significant, they can provide the type of liquidity that may be necessary against the backdrop of the coronavirus.

How has the coronavirus pandemic influenced your long and short term investment strategies?

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