Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.

Just like you and me, the federal government can run out of money if it doesn’t plan ahead—and like for us, it can lead to dire consequences.

For now, it appears this looming crisis is averted. On Tuesday, Congress voted to raise the debt limit by $2.5 trillion, and President Joe Biden signed the bill into law today.

The amount is expected to pay the Treasury’s bills until sometime in 2023.

It’s been a long and winding path to get to this point. The matter of whether to raise the debt limit has been hotly debated on Capitol Hill for months while Democrats and Republicans debated a full slate of polarizing issues, from government funding to social infrastructure.

But although the idea of the debt ceiling may feel distant from the lives of ordinary Americans, how it’s handled in Washington can easily cascade into your own financial situation.

Here’s what you should know about the recent debate about raising the debt limit.

What Is the Debt Ceiling?

The debt ceiling, or the debt limit, is the amount of money the United States federal government is allowed to borrow in order to pay its bills. Those bills include items like Social Security payments, military and federal employee salaries, and tax refunds. The country also has to pay interest on debt it has already taken out to pay older bills.

If the country doesn’t increase its debt limit, it’s like maxing out a credit card: The bill-paying activity stops, and the government defaults on the financial commitments it has made.

This could mean delays for payments you’re expecting from the government, and it could impact how expensive it is to buy items on credit, the Treasury secretary has warned. A default could also cause turmoil in the stock market, which could affect the value of any investments you have.

Discussion about the debt ceiling can be confusing because government spending—the budget—is often discussed simultaneously. But while they’re connected, they’re two distinct challenges for lawmakers.

“Raising the debt ceiling doesn’t authorize additional spending of taxpayer dollars,” Treasury Secretary Janet Yellen wrote in a Wall Street Journal op-ed last month. “Instead, when we raise the debt ceiling, we’re effectively agreeing to raise the country’s credit card balance.”

Read more: Janet Yellen Is Sounding The Alarm On The Debt Ceiling. Will She Help Prevent A Crisis?

<…….

Source: https://www.forbes.com/advisor/personal-finance/biden-signs-debt-ceiling-increase/