Those of you who read the news—along with this blog, of course—may have seen headlines recently about the federal government shutdown, now in its third week. While the bulk of articles seem to be about a bunch of elected officials playing a game of chicken with one another, some reporters are putting a human face on their dispatches, sharing the stories of employees, contractors, and businesses directly and indirectly impacted by work furloughs and missed paychecks. Most disheartening are the profiles of struggling households, families for which a missed paycheck triggers a series of unfortunate events with the ultimate result being an erosion of Net Worth. And you know how we feel about that around here.
It doesn’t necessarily have to be this way, at least for the employees who will likely receive back pay for the time they’re furloughed. Certainly, if you are idled and won’t ever be paid for that time or you run a food cart that, say, sets up shop across from a now-ghost-town-like federal building, you have my deepest sympathies and please do dip into your savings and tide yourself over—that’s what Net Worth is for—while you look for another job that isn’t impacted by these shenanigans on a regular basis (cf. 1987, 1990, 1995, 2013, 2018)!
I’ll be honest—for the rest of you, who will likely be made whole when the federal government is back in business—a furlough sounds like a pretty nifty paid leave. That said, I can understand how you might be a little nervous that your back pay hinges on the whims of the 116th Congress … and our Dear Leader. As the fine print always reads, past performance is not indicative of future results.
Still, it seems extreme that you’d have to sell your truck because you missed a paycheck. Which is, according to the New York Times, what happened to one federal worker from Colorado. Alas, I’m sure he didn’t wait patiently to get the best price possible. While the financial travails of these 800,000 federal employees currently loom large, what’s happening to them—their income spigot suddenly and completely turned off—could happen to any of us, and it would behoove us all to be as prepared as we can for such a turn of events. If you’re thinking LBYMers are a pessimistic lot … you would be correct.
I’ve alluded to the importance of setting aside money each month for your “s–t happens” fund or what I call “living insurance”, but how do we go about doing this exactly? For starters, how big should this fund be? And where should you keep it? In a savings account? A CD? Under the mattress? There is no one magic number … and no perfect location. There are, however, two key questions you want to ask yourself as you determine what the right parameters are for you, given your goals (yup, always start with goals).
How much of your spending is discretionary? Put another way, dust off your worst-case-scenario budget (you have one, right?) and hold that family meeting to discuss reducing expenses. Include the kids. You want them to learn how to eventually manage their own finances, yes?
How long will it take to replace the income? Is there high demand for what you do? Are you willing to relocate? Do you have a side hustle to offset some of the lost income? Could you train to do something different? What is up in Washington, DC??!?
Let’s say you figure you can reduce your monthly expenses by 15% and it will take you three months to replace the income. Ideally, then, you’d like to have the equivalent of just a little over two and a half months of take-home pay saved up in a low-risk and liquid (i.e. readily convertible to cash) investment vehicle … i.e. not an actual vehicle.
Just in case.
Living insurance, like all insurance, is something I hope you never have to use. If you didn’t like the answer to either or both of these questions—if the amount needed seems unexpectedly large and daunting, say—that might be the nudge you need to make some bigger changes in how you spend your days and how you spend your money.
Don’t say the government never did anything for you.
Excellent point Grace. After a decade+ of listening to Dave Ramsey (setting aside his religious comments) we have 3-6 months of living expenses, disability insurance, and live way beneath our means. I’m self-employed, and my spouse works in engineering. Tech is up or it is down, the question is when will layoffs come, not if. And that’s how we handle our money. I’d add, for those wanting to step-up their handle on finances, can you put all assets and liabilities on an 8×10 piece of paper? When you can do that, I believe you know your financial life.
Thanks for putting these topics out there Grace, it’s crucial for so many Americans of any age.
You can help spread the word, too, Melinda! These are the important conversations with friends and family. We don’t have enough of them.