What a Congressional Gridlock Means for Your Money

What happened

The dust has settled after the midterms, leaving a divided government and warnings of what some describe as "Congressional gridlock." As a new Congress starts, observers have raised questions about lawmakers' ability to pass key legislation, such as spending bills that would keep the government open.

So what

There are a few ways in which a divided Congress could have an impact on the U.S. economy and, ultimately, your bank balance. As the New York Times puts it, "The new dynamic is more likely a prescription for shutdown and gridlock."

Analysts argue that a split government can be a good thing for stock markets. Markets tend to favor stability, and historically equities have performed better when Congress is divided. Essentially, a government that struggles to make big legislative moves is unlikely to upset the status quo, which reduces uncertainty.

On the other side of the equation are concerns a divided Congress might struggle to pass legislation that's needed to keep the government running. Specifically, each year, Congress needs to pass a certain number of spending bills. If it doesn't, the country may face a government shutdown, which can affect the activities of various federal agencies.

According to the Committee for a Responsible Federal Budget, previous government shutdowns have had an impact on a host of programs, including Social Security payments and Medicare applications, air travel, and IRS activities.

Another potential area of contention is a debate around raising the debt ceiling. Also known as the debt limit, this is the amount of money the U.S. government can borrow in order to meet its obligations. Without getting into the politics of it, the U.S. spends more money than it earns and so the government relies on its debt to continue to make payments. In the unlikely event that it can't raise the debt ceiling later this year, it could default on certain payments, destabilizing the U.S. and global economy.

Now what

If you're already braced for a recession, the steps you might take to prepare for a government shutdown or other issues caused by a divided Congress are very similar. It means being ready for loss -- or delays -- in income, disruptions to the stock market, and potentially higher debt payments.

Here are some steps you can take:

• Revisit your emergency fund: If you don't have three to six months' worth of living expenses stashed away in a savings account, make this your top financial goal for 2023. You might even consider increasing your emergency savings so you have enough to tide you over for as much as a year.
• Pay down debt: Even if we don't reach a worst-case scenario of a government shutdown, we might enter a recession. Both situations can translate into higher rates for borrowers. If you carry high interest debt, particularly of the credit card variety, look for ways to pay it down.
• Reevaluate your borrowing: If you're considering taking on other kinds of debt such as a car loan or mortgage, there's no right or wrong answer. Be aware that rates might go up next year and borrowing could become more difficult. But a lot depends on your financial situation -- don't rush into a decision because of these very hypothetical scenarios.
• Consider your risk exposure: When it comes to your stock investments, it's rarely a good idea to make panic decisions. But now might be a good time to think about the levels of risk in your portfolio, especially if you're close to retirement. Consider how much of your portfolio you want to hold in stocks versus bonds, and whether you might diversify into other assets such as gold or real estate.