With the failure of the government to pass a continuing resolution amendment, thousands of government workers today received furlough notices. Thousands more may receive them later this week and next. Luckily for them, unlike workers in the private sector who are not paid during a layoff, these government workers will be paid for the time they are on furlough when the government is reopened if history is a guide . Still, for many of these people a delay in pay for a few weeks will result in missing a car payment or a credit card payment. For some it might be difficult to purchase even groceries or put gas in the car.
What will be a major crisis for many families will be a minor inconvenience for others. The difference is not living on the ragged edge of one’s family income. Unfortunately, many people (the majority, perhaps) have little in savings and have payments for loans that almost match any remaining income after food, gasoline, and utilities are purchased. This leaves no room for even a minor delay in their income streams.
It doesn’t need to be this way. There is no reason for a slow paycheck or a mischarge on a credit card to put a family into dire financial straits. Here are some steps to take to ensure you and your family are ready for the next furlough:
1. Build an emergency fund. Having 3 months worth of cash in a money market and another 3 months worth in a short-term CD will allow you to go for a few months before the wolves come knocking. It also will provide ready cash to float the periods when an expense is due before payday. In cases of events like a car breakdown, an injury, or a fairly large home repair it will also provide the funds needed to avoid racking up credit card balances. Having an emergency fund is probably the single best financial choice one can make and will save you hundreds of thousands of dollars over your working lifetime.
2. Keep rigid obligations to 60% of income. Don’t let loans build to the point where more than 60% of your take-home pay is fully obligated each month. This also includes cell phone contracts and any other types of contracts that include a large fee to cancel. Expenses that can be cancelled quickly, such as a cable bill, do not count since these could be terminated in the event of a furlough.
3. Keep a free cash flow of 10% of take-home pay each month. Make sure all of your regularly occurring expenses don’t add up to more than 90% of your take-home pay each month. This leaves 10% to rebuild the emergency funds when needed, invest when the emergency fund is fully funded, and perhaps direct towards one-time expenses such as furniture and appliance purchases during some months. It can also be directed towards Christmas gifts or a minor vacation once ina while.
4. When possible, make your home free and clear. Not having a home mortgage means you at least won’t get evicted should your income stop (at least until the property taxes overwhelm you). Get a 15 year mortgage and pay it off in 10-12 years if you can. This may mean buying a smaller house, but you can always continue to save the mortgage payment once it is paid off and upgrade to a bigger home for cash later. As a bonus, because most of your money will be going to principle instead of interest, you’ll pay about half for your home what others on 30 year mortgages are paying. This means you’ll have a couple of thousand dollars more to work with over your lifetime.
With proper money management, you and your family can be ready for a furlough or an unexpected event that stops or delays your income. This can make a big difference.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.