Monday, February 11, 2019

Plan for Contingencies

Going without an expected paycheck is a hardship for most people. I've seen statistics claiming that one in three Americans is one paycheck away from homelessness. After the recent government shutdown, and watching footage of furloughed government employees lined up at soup kitchens, I suspect those numbers might not be far off.

And many jobs in corporate America are not as secure as a position with the federal government. My husband and I both worked in the airline industry during the eighties, nineties, and early two thousands, when carrier after carrier went bankrupt and/or laid off thousands of employees, and those remaining took huge pay cuts and lost benefits.

As I point out in my new book, Live Well, Grow Wealth, it's important to have an emergency fund.

What is an emergency fund? At least three to six months' living expenses stashed in a low-risk, liquid investment such as a savings account or money market fund. And it's money you don't touch unless there's an emergency: a large, unanticipated, unavoidable expense. Like losing your income.

Having an emergency fund saves you from diving deeply into debt, raiding your retirement savings and thus losing irreplaceable time value you've built up, or liquidating investments at an inopportune time, forcing you to lock in losses or incur unplanned capital gains.

If you don't have an emergency fund, now is the time to start building one. Setting aside a few dollars a week shouldn't be too daunting. Round up your change. Forgo a few treats or vices. The account won't look like much at first, but leave it alone and keep adding more; pretty soon, it will grow.

A great way to kickstart an emergency fund is with a lump sum. Maybe that tax refund you're hoping for? Or if you work for the federal government, maybe you'll receive a big check for back pay. Put what you don't need to cover unpaid obligations into your emergency fund.

What if you don't have time to save? You're living paycheck to paycheck, with nothing left over. Another shutdown is looming.

If you survived the last furlough, you hopefully developed some frugal habits out of necessity, some of which could be made permanent. Analyze your expenses and divide them into Essential and Discretionary. Drop subscriptions and memberships you're not using. Defer appointments for haircuts, manicures, professional cleaning, classes that have not been prepaid. Cook at home more, and build menus around what is on sale at the grocery store. Combine errands to use less gasoline. Don't shop for new clothes, electronics, toys, etc. Consider doing some things yourself that you normally pay someone to do for you, such as yard work, house cleaning.

Keep your credit record spotless or improve your score by always paying your bills on time. Leave plenty of available credit on your accounts and keep your debt ratio low. That way, if you do have to borrow money, you'll qualify for a decent rate and won't have to resort to usurious payday loans.

In my opinion, funding the government and paying its staff shouldn't be tied to other legislation, and politicians shouldn't jeopardize workers' livelihoods when they can't agree. But I'm not in charge. You have to be prepared for anything, by reducing your expenses so you're living within your means and building an emergency fund.

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