Money lessons learned from the government shutdown
Fully 800,000 federal workers went for more than a month without getting paid in the longest government shutdown in U.S. history. Stories filled the airwaves of workers struggling to make ends meet by taking out loans, applying for unemployment, turning to food banks or launching GoFundMe campaigns. The shutdown highlighted an unfortunate reality: many Americans are not prepared for financial emergencies.
“This is an example of what happens to individuals and families that are living paycheck to paycheck and haven’t set up the proper emergency funds to handle uncertainty,” says Amin Dabit, director of advisory services at Personal Capital.
Whether you are a government employee or someone working a six-figure job in the private sector, everyone needs to prepare for the unexpected. Dabit says ideally workers should have three to six months of expenses tucked away for a rainy day.
"No matter what your income is, you should look to save 5 to 10 percent of that in an emergency fund,” he says. “I know that’s easier said than done when you are trying to pay the bills. But it’s important to live a little below your means so you can put yourself in a position to build that emergency fund. Save it in a cash-like vehicle or something that is FDIC insured where you can easily access it and you don’t have to go through a lot of loopholes.”
Still unsure how to start saving? If you have direct deposit, Dabit says you should find out if your employer will allow you to contribute a specific amount of your check into a designated emergency fund savings account. Also, whenever you receive a raise from your job, consider living the same lifestyle you have been living and put your raise into the fund.
The shutdown not only forced workers to look closely at their emergency funds but also their budgets. Dabit suggests separating your spending in three buckets: your needs, your wants and your long-term goals.
"Your needs are things like your rent, mortgage, groceries, and utilities," he says. "How much am I spending a month on the things that I need to survive or we need as a family to survive?"
The next bucket contains your "wants." Dabit says workers should continue cutting their spending in this bucket as government workers face the possibility of another shutdown.
"Those are things like restaurants or any type of entertainment, shopping, hobbies or month to month memberships," he says. "Those are things you can directly cut to start saving on how much you are spending on a monthly basis."
Dabit says the last bucket should focus on any long-term goals that you have, as well as debt management. From personal loans to credit card cash advances; workers now have to face all of the debt they racked up during the 35-day shutdown. He says it’s important to approach the debt strategically:
Did you take out any payday loans?
“Pay those back as fast as you can,” Dabit says. “Those typically have higher interest rates. Some are as high as 20 percent. Those cost a lot of money in the long run.”
Did you take out any personal loans?
“You should ultimately consider the interest rate on the loan and how much it’s costing you,” he says. “Some loans can be 15 percent. Even ones in the six to seven percent range are high. But you should look to eliminate the debt as fast as you can.”
Did you take a loan from your retirement account?
“Ideally you are paying that back over time,” Dabit says. “Given the uncertainty over the next few weeks, maybe don’t pay those back so aggressively. But long term, your goal should be to pay those back over the next three to six months.”
Did you rack up credit card debt?
“An aggressive pay down on those is also a good idea, especially if the interest rate is high,” he says. “Looking for ways to pay those down quickly should be a priority.”
Did you come to payment agreements with creditors?
“I encourage everyone to communicate with their lender and see what makes the most sense,” Dabit says. “If you already reduced the payment for a time, until we see what happens in the next few weeks, I would stick to those payments as long as your lender is okay with it.”
What should you do with your first paycheck?
Office of Personnel Management Director Margaret Weichert tweeted on Tuesday that most furloughed employees will be paid by Thursday.
“The first thing back, they should make sure their bills are up to date,” Dabit says. “Pay the bills that fall under your needs. You can make the minimum payments, but look at the highest interest rate debt and pay that more aggressively."
Are you worried about your credit score?
Workers may be concerned about damage to their credit because of late or unpaid bills. Experian says one late payment likely won't significantly impact your credit if your credit history is in good standing. While you may be charged a late fee; the missed payment might not appear on your credit report at all. Lenders typically don’t report late payments to the three credit bureaus – Experian, Equifax and, TransUnion - unless payments are 30 days or more past due. However, Experian notes that servicers of federal student loans are required to report late payments to the credit bureaus. In this instance, your credit score might take a hit. Analyzing data from TransUnion, Credit Sesame says if you are 30-days late on a loan, it can drop your credit score an average of 25 points.
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Dabit says the best way to handle a dip in your credit score is to come up with a plan to pay the debt back in a timely manner. He adds that workers should also avoid taking on new debt, especially with the threat of another government shutdown. President Donald Trump has warned that if an agreement is not reached to fund his border wall, the government will shut down again on Feb. 15 or he will declare a national emergency. If the government shuts down again, workers may once again find themselves in the same rickety financial boat.
“Don’t act any different than you have in the last month,” Dabit says. “Stay within your budget. Stay within your means. Keep living as lean as you can especially for the next few weeks as we don’t know what will happen.”
Linda Bell joined FOX Business Network (FBN) in 2014 as an assignment editor. She is an award-winning writer of business and financial content. You can follow her on Twitter @lindanbell