While furloughs have been an unfortunate way of life for our civilian federal employees, the 2018-2019 furlough officially crossed into new territory by shattering the previous record of 21 days. As a result, federal employees are suffering financially — and they are not alone. Numerous studies have shown that the average American effectively lives paycheck-to-paycheck and federal employees are no exception. In fact, in 2015 the National Bureau of Economic Research found that the median federal worker only had enough assets to cover eight days of average spending before the 2013 shutdown.
Ways to generate immediate income
While the recent legislation giving federal employees back pay provides long-term relief, there still remains anxiety throughout the federal government and contracting community: How do I take care of my family and pay my bills today?
Fortunately, you may have several options to consider for immediate income:
Use the equity in your home
If you have an open Home Equity Line of Credit (HELOC), you can access this money today. While borrowing money does require you to pay interest, today’s historically low interest rate environment makes the HELOC an immediate and low-cost option to provide short-term relief.
Review any special arrangements with your bank or creditors
There are numerous banks and credit unions offering collateral-free (and sometimes interest-free) short-term loans and certain creditors are offering late-payment forgiveness. Before you panic, contact your banking institutions and creditors to understand your options.
Access your Thrift Savings Plan (TSP)
If you are a federal employee hired after 1983, you have a TSP that allows you to access up to $50,000 through a loan. After you complete your loan application online, the TSP quotes that the loan will be processed in 3 business days and warns that you should expect an additional 7-10 business days to receive the funds. It is important to note that when taking out a loan, you should consider requesting an amount higher than you believe you will need because you may be expected to begin making payments on this loan prior to the end of the furlough.
We now know that federal employees will receive back pay, which means that they will be required to repay any unemployment benefits that they receive from the state. If you need funds to pay your bills today, filing for unemployment is effectively providing a temporary and interest-free loan of between $50 and $480 per week. You should expect at least a 2-week period between the time you file and the time you receive payment (depending on your state).
Recently, several states received guidance from the federal government clarifying that federal employees that are required to work (whether they are paid for this work or not) would not meet the definition of “unemployed” for unemployment benefits. While approximately 380,000 federal employees would still be eligible for unemployment benefits, this clarification serves to exclude approximately 420,000 workers from this benefit.
Tips to avoid future financial setbacks
Looking to the future, what steps should you take to position your family for financial stability during a future furlough?
Create your emergency fund
Many experts recommend that you maintain an amount equal to 3-6 months of expenses in a liquid account to protect against the loss of income for many potential risks including death, disability and, of course, furloughs.
While it may seem daunting to go from a paycheck-to-paycheck lifestyle to accumulating 6 months of savings, it’s never too late to begin saving with that goal in mind. The most important step in this process is to start. Two of the most effective ways to begin are:
- Dedicate a portion of your next raise and all future raises toward this goal by directing funds into a separate account.
- Personalize your accounts by naming them according to your goal. We are more likely to contribute to a Vacation Fund or New Car Fund versus a nameless string of numbers, so an Emergency Reserve Fund could provide you with the nudge you need to continue making this account a priority.
Give yourself access to your equity
We know the difficulty that many Americans face when funding an emergency fund in an amount equal to 3- 6 months of savings. One of the easiest and more effective ways to create liquidity in your financial portfolio is to open a Home Equity Line of Credit (HELOC) against your home and maintain a balance of $0. This can be a low-cost alternative to provide income for short-term financial needs. In some cases, your bank may offer a no-fee HELOC application process.
The loss of a paycheck can be traumatic for anyone. It is within these times of stress where it is most important to take a calculated approach to solve your financial situation. If you’re unsure where to start, a financial planner can help you decide which options are best for your family and what steps to take to create an emergency fund.
Greg Klingler, CFP, ChFEBC, is Director of Wealth Management for the Government Employees’ Benefit Association (GEBA). Greg has worked exclusively with State and Federal employees since 2003 and specializes in retirement planning using pensions, survivor pensions, employer sponsored insurance, and retirement plans as well as portfolio analysis, estate planning and college planning.