Unfortunately, many furloughed employees are living paycheck-to-paycheck these days – leaving very little room for error. That’s a scary place to be. If this is you – listen up!
If you have little-to-no savings that is accessible to you when you need it, a job loss, furlough or medical emergency could be catastrophic to your finances. Emergencies are bound to happen at some point, and we often have no control over that. However, what we DO have control over is being financially prepared to handle it.
This will not be the last government shutdown, and let’s face it – shutdowns are only ONE of MANY things that can cause a serious hiccup in your confidence that you can you pay bills. This isn’t about politics and it isn’t about pointing fingers at WHY you are not getting paid. Having an emergency fund is about you being in control despite the reason for the hiccup.
What is an Emergency Fund?
An emergency fund is money specifically set aside for unforeseen costs like medical expenses, a car or home repair, or not getting paid for a several weeks. Having an emergency fund can be the difference between a minor inconvenience in your financial life and complete disaster that permeates your entire life. You don’t want to face dire consequences such as foreclosure or bankruptcy.
An emergency fund protects against life’s unexpected expenses and gives you a great peace of mind. No one wants to live one paycheck away from not being able to pay the mortgage or one auto breakdown away from not being able to get to work.
How Much Should I Have in My Emergency Fund?
According to most financial experts, it’s recommended to save at least three to six months of net living expenses in an emergency fund. Calculate your three- to six-month number to include only necessary expenses like rent or mortgage, food, health insurance, life insurance, utilities, car payments, car insurance and gas. It does not have to include any “extras,” such as going out to dinner, entertainment, and clothing expenses.
Therefore, if your family requires $3,000 a month to pay all of its basic expenses, then you should strive to accumulate $9,000 to $18,000. This sounds like a lot of money, but if a certain amount is put away on a steady basis, your consistent savings can build up quickly.
Saving three to six months of basic expenses can be daunting, but you don’t have to accumulate it all at once. Start small. Shoot for a starter emergency fund of $500 to cover little emergencies. Once you’re on track, focus on building up your savings and then set a reasonable time frame to get to the six-month number. But don’t give yourself too much time—growing your emergency fund should be a priority.
How to Save For an Emergency Fund
Try cutting back on things that are not needed. The money saved can be placed into a savings account each week, and this account will continue to grow as you continue to cut out any unnecessary spending. It’s easier to cut out frivolous spending if you know there is a good reason (and you can continue to see this account grow).
One way to do this is to cut back on non-essential items such as eating out every day or buying fancy clothing that you don’t really need. Keep a financial journal of the items you cut out and put that money into your savings account each week. As the account starts to grow, you’ll probably start to feel a real sense of accomplishment and relief, and you most likely won’t even miss the things that you cut out of your spending.
Until you hit that six-month mark, remember to make building your emergency fund a priority. If you can throw an extra $100 a month in there, do it. Or you can use any “extra” money you get from a bonus, pay increase, monetary gift, etc., to help you reach your goal faster.
Keep reading below for another strategy that doesn’t require any additional money out of your pocket…
Emergency Fund vs. Withdrawing from Your TSP
There are many federal employees feeling the effects of this shutdown, and lawmakers are attempting to alleviate some of the financial pain. Recent legislation has been introduced to allow “excepted employees” to make a withdrawal from their qualifying Thrift Savings Plan (TSP), without a penalty, up to the amount of money they would otherwise be receiving for their pay during a government shutdown. There’s also legislation that would offer employees a no-interest loan from the Treasury of up to $6,000 to help pay mortgages and cover bills for other necessities. Another bill would protect federal employees from foreclosures, evictions, and loan defaults during a government shutdown.
Even if every one of these bills pass, this only helps you if the government shuts down. What about if another emergency arises? What protections do you have then?
It would be irresponsible of me to not dive deeper into the discussion about dipping into the TSP. Withdrawing from your TSP can be a very slippery slope. Retirement funds – like the TSP, IRAs and 401(k)s – are designed to be long-term investment tools. Instead of dipping into these types of accounts, build your emergency fund to weather these temporary storms.
To help accomplish this, many employees decide to temporarily lower their TSP contributions (to the level that is matched, i.e., 5% of salary), and sock away the money that they would have otherwise put into TSP to their savings account. Once the emergency fund is large enough (around that six-month amount), resume the original TSP contribution level. End result –you have two buckets of money designed for two very different reasons that can be used accordingly (and without an act of Congress).
Just remember that a shutdown is temporary, but retirement is for (hopefully) a very long time. Being able to move confidently into retirement has a lot to do with proper cash flow and being able to pivot when necessary. Without the foundation of adequate cash flow (and emergency savings), most financial plans fall apart.
You don’t want to be strapped for cash during a shutdown, but you also don’t want to be short-sighted regarding your long-term financial goals and end up running out of money in retirement. Both are important aspects to consider and both require planning to avoid a negative outcome. Both deserve your attention and action.
Don’t Have an Emergency Fund?
Whether it’s a government shutdown, a market downturn, an emergency, or a myriad of other reasons, having control of your assets (like income) becomes exponentially more important when its unexpected.
If you don’t have an emergency fund, this furlough may be the “reality check” that you need to start building one and make it a top priority. Remember, once this emergency fund is in place, you get to be in control of how you react to future hiccups.
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ABOUT THE AUTHOR:
Chris Kowalik is a federal retirement expert and frequent speaker to federal employee groups nationwide. In her highly-acclaimed Federal Retirement Impact Workshops, she and her team empowers employees to make confident decisions as they plan for the days when they no longer have to work.
As the developer of dozens of highly-regarded retirement planning materials for federal employees and the creator of the FedImpact Webinar and the FedImpact Podcast, Chris has also analyzed the challenging retirement scenarios for thousands of federal employees – helping them to avoid costly mistakes, and highlighting opportunities for them to gain greater financial security in their retirement years.
Chris’ candid and straightforward nature allows employees to get the answers they need, and to understand the impact these decisions have on their retirement. After all, if what you thought was true wasn’t, when would you like to know?