TL;DR: The US debt ceiling crisis can create uncertainty for financial markets, borrowing costs, and investors. This guide explains how the debt ceiling works, what past standoffs can teach investors, and how a long-term financial strategy can help during periods of market volatility.
Main points:
- The debt ceiling limits how much the federal government can borrow to meet existing financial obligations.
- A U.S. default could disrupt markets, raise borrowing costs, and affect government, business, and consumer finances.
- The 2011 and 2023 debt ceiling standoffs ended without default, although the 2011 episode increased Treasury borrowing costs and coincided with a U.S. credit rating downgrade.
- Diversification and a realistic assessment of risk tolerance can help investors prepare for market volatility.
- Staying focused on a long-term investment strategy can help investors avoid emotional decisions driven by short-term market swings.
The US debt ceiling crisis can have real effects on markets, borrowing costs, and investor confidence. Knowing what the debt ceiling is, how it differs from the national debt, and what could happen if the U.S. defaults can make the headlines easier to follow. It can also help you make calmer, more informed decisions about your own finances.
What Is the US Debt Ceiling Crisis?
The debt ceiling crisis in 2023 largely left the news cycle at the end of January 19, when the Treasury Department took “extraordinary measures” to avoid hitting the ceiling and defaulting on its debt. Those measures formed a temporary stopgap: They didn’t solve the debt ceiling problem, but they did give Congress a few more months to choose how to address the issue by redirecting monies and assets that fund retirement programs for federal workers.
What a Budget Deficit vs National Debt
A related issue is budget deficit vs national debt. A budget deficit occurs when the federal government spends more than it collects during a given fiscal year. The national debt is the accumulated amount the government has borrowed over time to finance those deficits and other obligations.
Why Does the US Have a Debt Ceiling?
Congress created the statutory debt limit as part of its control over federal borrowing. Today, Congress periodically raises or suspends that limit so Treasury can continue borrowing enough money to meet existing federal obligations.
How Did the 2023 US Debt Ceiling Crisis Unfold?
In February 2023, the Congressional Budget Office estimated that Treasury’s extraordinary measures could last until sometime between July and September. By May, updated tax receipts led Treasury Secretary Janet Yellen to warn that the government could default on its obligations as early as June, with little sign of a debt ceiling resolution coming from Congress any time soon. This situation has caused Wall Street investors to become jittery, and that’s where your personal finances come in.
The question then becomes, what can you do to prepare your finances for the result of this debt ceiling crisis, whether it’s raised or not?
Diversify
I talk about diversification a lot because it’s important to have a balanced portfolio. But diversification isn’t just about making sure you have a broad spectrum of assets in your portfolio. You also want a diversity of perspectives among the people who are helping you choose those assets. If you only take advice from a single money manager, you risk your whole portfolio if that perspective happens to be wrong.
This is why, at Asset Preservation Wealth & Tax, we use multiple money managers when making investment decisions. We want to bring multiple points of view to the table. We want a variety of people who will react differently to given economic situations and events.
That helps us stay balanced, which reduces what we feel is one of the biggest risks in any portfolio: investing with an overly limited perspective. As we are already seeing increased market volatility in reaction to the debt ceiling crisis, it makes sense to ensure our portfolios are properly diversified to avoid overexposure to any one potentially volatile asset class.
Understand Your Real Risk Tolerance
Whenever markets become volatile, there’s a strong temptation to do exactly the wrong things at exactly the wrong times.
Investments that performed well for you previously may drop suddenly and sharply. That can easily cause some investors to panic and divest those assets because they fear losing even more money.
How Behavioral Finance Influences Investment Decisions
I go more in depth into the rationale behind that tendency in my recent blog about behavioral finance, but many investors end up selling their assets for less than they paid for them. Selling at a loss is a terrible way to make money!
This is why it’s very important to truly understand your risk tolerance. Don’t make the common mistake of assuming you’re comfortable with higher-risk assets just because those assets are performing well when you invest. You can’t be accurate about your comfort level if you incorrectly assess how risky those assets are.
Consider How You Would React to a Loss
Think about how you will feel if those assets lose value after you buy them. Will you still be OK with the risk you took on? Will you stay invested so you can take advantage of any future gains, or will you dump them in a panic, losing money on the transaction?
In other words, if you decide you like skydiving, you don’t want to discover you’re afraid of falling after you jump out of a perfectly good airplane. You want to know you’re risk-averse before you fall!
Reassess Your Risk Tolerance Over Time
To self-check your risk tolerance, think about how your comfort level with risk fluctuates. A good goalpost is that your risk tolerance changes slowly over time. For example, early in your working life, taking on higher risk can pay off through higher gains.
Higher risk is easier to absorb in the early stages of saving because you won’t need to access that money for many years, which gives those investments time to recover should their value drop. As you get closer to retirement, it’s generally appropriate to dial back that risk. This slow alteration of your risk tolerance is normal and sound financial wisdom.
Avoid Letting Market Conditions Dictate Your Strategy
On the other hand, if you tend to be aggressive when the market is up, then quickly swing to feeling more risk-averse when the market drops, that could be a sign that your risk self-assessment needs adjustment. If you find yourself going from aggressive to conservative virtually overnight, you’re no longer strategizing risk; you’re timing the market.
Why Time in the Market Can Matter More Than Timing
Bank of America conducted a study that examined market performance from 1930 to 2020 to determine the wisdom of timing the market versus staying invested long term, given that predicting the market with 100% accuracy is impossible. The results showed that an investor who tried to time the market and missed the 10 best-performing days each decade would have netted a 28% return on their investment. However, if they’d stayed invested through positive and negative market swings, their return on investment would have been a staggering 17,715%!
This starkly illustrates why it’s a very good idea to determine your risk tolerance, and to be sure your perceived comfort level with risk is not itself volatile. As I frequently tell clients, time in the market is more important than timing the market.
What Happens If the US Defaults on Its Debt?
Once Treasury exhausts its available cash and extraordinary measures, the government could become unable to meet all its obligations on time. A default on Treasury debt could disrupt financial markets, increase borrowing costs, weaken confidence, and affect households and businesses.
A default could also affect the federal government’s credit standing. Higher Treasury borrowing costs can eventually influence other interest rates across the economy, including rates paid by businesses and consumers.
US Debt Ceiling History
Looking at US debt ceiling history provides some context. In 2011, the United States reached its debt limit, and Treasury used extraordinary measures while Congress debated an increase. Congress eventually raised the limit, and the country avoided default.
The standoff still had financial consequences. The Government Accountability Office later estimated that delays in raising the limit increased Treasury borrowing costs by about $1.3 billion during fiscal year 2011. Standard & Poor’s also lowered the U.S. long-term sovereign credit rating from AAA to AA+ on August 5, 2011.
The 2023 standoff also ended without a default. Congress passed the Fiscal Responsibility Act, which suspended the debt ceiling through January 1, 2025.
Final Thoughts
If our elected officials were to allow the United States to hit the debt ceiling, the results could well be disastrous, at least for the government on a global scale. Just as you have a credit rating, so too does the government, and if it were to default on its debts, that credit rating would suffer. This would make borrowing money more expensive not only for the government, but for businesses and individuals as well. Shockwaves could rock the financial markets, and if we weren’t already in a recession when it happened, hitting the debt ceiling could be the tipping point.
Of some comfort is the fact that we’ve been here before. The United States hit the debt ceiling in 2011. While the country avoided default, it still had a significant impact on markets and retirement savings and caused the Federal Government’s credit rating to drop for the first time in history. However, the country recovered; as with most things, the bad times did not last forever, and the subsequent decade saw one of the best market performance records in history.
In short, don’t panic. Check with your trusted financial advisor to make sure your portfolio is set up to weather potential storms. If you haven’t already done so, choose an investment strategy and then stick with it. If you feel rising panic and a strong urge to divest to “cut your losses,” consult with your financial planner first. Let your money managers prepare for specific risks so you don’t risk losing ground by reacting rashly.
Frequently Asked Questions About US Debt Ceiling Crisis
How close is the US to hitting the debt ceiling?
The U.S. is not currently at its statutory debt limit. In July 2025, the debt ceiling was raised from about $36.1 trillion to $41.1 trillion, allowing the Treasury to resume normal borrowing operations.
Who is the only president to pay off the national debt?
Andrew Jackson is the only U.S. president under whom the national debt was completely paid off. The federal debt reached zero in 1835, although the government began borrowing again soon afterward.
Who is the No. 1 debt country in the world?
It depends on how debt is measured. The United States has one of the world's largest public debt burdens in dollar terms, while Japan has the highest gross debt-to-GDP ratio among major economies.
What happens if the US goes over the debt ceiling?
The Treasury generally cannot simply continue borrowing beyond the statutory limit. If Congress does not raise or suspend the limit and Treasury exhausts available cash and extraordinary measures, the government could fail to make some required payments on time, potentially disrupting financial markets and increasing borrowing costs.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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