According to the Washington Post, about 800,000 employees are either furloughed or working without pay as a result of the most recent government shutdown. While the President and Congress are feuding over funding governmental operations, these workers are not being paid. However, as the length of the shutdown grows, some federal workers are getting concerned about how it will affect their lives.
After not getting paid for weeks, many of them are understandably concerned about how they might make their next mortgage or rent payment, or even buy food as their liquid money depletes. Unfortunately, this isn’t surprising. According to Federal Reserve data, 40% of people don’t have $400 to handle an emergency expense without borrowing. Obviously, rent and mortgage payments are a lot more than that, but it shows that many of these employees have failed to follow the first rule of financial planning: have a liquid emergency fund.
Suggestions regarding the size of an emergency fund vary. However, in my opinion, it should be at least three months of expenses, and often should be more depending on how secure your income is. The less stable your income, the greater the size of your emergency fund should be. While government employees have some of the most stable jobs in the country and therefore can have smaller emergency funds, being concerned about running out of money after less than one month suggests that their funds are not sufficient to deal with emergencies such as the ones they are facing now.
We never know when we are going to have a surprise that will force us to draw upon our savings, but it is important that we have enough liquid cash to deal with those surprises. If they don’t have enough cash, many may have to tap into more illiquid forms of money, such as investment accounts (when they are down 15%) or IRAs and 457 plans, which could come with hefty penalties for tapping the funds. Or they may accumulate high interest credit card debt while they wait for the shutdown to end.
Whether it comes from a sudden loss of income, home or auto repair, or medical needs, we never know when a fiscal short-term emergency may occur. However, you can be prepared. If you don’t have an emergency fund, you can start building one today.
Russell D. Rivera, CFA®, CFP®, is the Founder and President of Voice Wealth Management (Voice). He considers himself as a Personal CFO and Financial “Therapist” for entrepreneurs, young professionals, and their families. He helps clients make prudent financial decisions regarding spending, saving, investing, and planning while giving a voice to the individual client's financial priorities and experiences. Get in touch with Russell at 646-630-0980 and voicewealth.com.