A Lack of Financial Planning Leads to Unpleasant Consequences

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By on January 13, 2019 in Pay & Benefits with 0 Comments

Piggy bank on a desk labeled 'emergency fund' next to stacks of cash and a calculator

Most federal employees should be able to survive a pay period or two without income from their federal job. This is especially true if they know that they will be receiving pay for the time they were furloughed, as seems to be the case.

Nonetheless, the news is full of stories about furloughed employees who have set up “go fund me” accounts and about agencies who suggest pet sitting and garage sales as ways for their employees to weather the furlough period, even mentioning that “bankruptcy should be a last resort”. Going bankrupt because of a furlough? Please!

Admittedly, there are some federal employees who find themselves in a financial bind that is not of their own making; for example, a newly hired, low graded employee with a large family to support; but many furloughed employees who are living paycheck to paycheck are themselves responsible for the financial bind in which they find themselves.

Financial advisers have, for years, been talking about the importance of an emergency fund that will cover anywhere from three months to a year’s worth of expenses. In my pre-retirement seminars I suggest that we federal employees can probably get by with three months’ worth of expenses because our jobs are relatively secure.

It’s not that difficult to set up an allotment to a credit union, or direct debit to an outside savings account where you can begin to grow your emergency fund. You can even get decent rates at online banks (most of which are FDIC insured). A check on Saturday, January 12, 2019 showed both Capital One and Ally banks offered a 2% return and CIT bank offered 2.45%. Those returns are higher than the 2018 annual returns of all but one of the TSP funds.

Federal employees are not losing their jobs because of the furlough, they are not even losing the pay they are due. They are simply having their compensation delayed due to political theater in Washington DC. The cartoon at madmag.com overstates the situation when it shows two worried parents talking to their teenaged son, saying. “Listen, we know your dream is to become a federal employee, we’re just asking you to consider a career with more job security, like a street performer or a poet.”

The authors of the book The Millionaire Next Door have suggested that the best way to accumulate wealth is to consistently live below their means. Obviously, the greater your means, the easier it is to live below them. Much of what this article suggests is easier to accomplish for a GS-13 than it is for a GS-7.

Living below your means does not mean that you have to forgo the “good things of life”; it does, however, mean that you should not accumulate debt to do so. Once you’ve established a cushion for emergencies, you can really enjoy life! There’s nothing wrong with an occasional family vacation to Disney World; what’s wrong is going into debt to take an annual family vacation there. 

We don’t want to neglect our retirement savings, but be aware that you can’t tap your TSP for a short term financial disruption like a furlough. A furlough is unlikely to meet the criteria for a TSP hardship withdrawal. If you’re under 59 ½ and withdraw money from an IRA to help you survive the furlough, you will owe a 10% early withdrawal penalty in addition to any taxes that might be due.

I don’t want to sound like a heretic, but, if you don’t have an emergency fund, consider contributing less to the TSP in order to build up three months’ worth of expenses in an emergency fund. Do, however, strive to contribute 5% to your TSP in order to get the government match.

Unless things change politically, furloughs will be more likely, rather than less likely. There is a need for financially strong employees, not financially fragile ones. Let this furlough be a wakeup call to those of you who do not have emergency funds; start setting money aside for one once you are back in pay status. As the Boy Scout motto says: Be Prepared.

Agencies can request to have John Grobe, or another of Federal Career Experts' qualified instructors, deliver a retirement or transition seminar to their employees. FCE instructors are not financial advisers and will not sell or recommend financial products to class participants. Agency Benefits Officers can contact John Grobe at [email protected] to discuss schedules and costs.

© 2019 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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About the Author

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.

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