Not many people expected this recent shutdown to last for so long, and it hurt a lot of families that missed out on paychecks.
A Career Builder survey from 2017 found that 78% of employed Americans live paycheck to paycheck, and the Federal Reserve issued a report the same year showing that 44% of people couldn’t come up with $400 for an emergency if they had to.
Many of the 800,000 federal workers who were denied pay during this recent shutdown fall into this category as well, including some that are relatively well-compensated. When their paychecks go dry, and they can’t quickly access their TSP, many federal workers find themselves out of funds to pay their monthly bills.
Contractors are likely even more affected because they generally do not receive back pay for missed work, and many contractors work in lower-paid service jobs. The media keeps talking about the 800,000 federal workers without pay, but as the Washington Post reports, many contractors are also affected. Due to a lack of available records it’s unclear how many contractors are affected, but there are more contractors doing work for the Federal Government than direct federal employees.
The Importance of Having an Emergency Fund
This shutdown showed how important it is for everyone, including federal workers and contractors, to build up an emergency fund when times are good and money is flowing.
An emergency fund is a personal savings account that is quickly accessible to you for unexpected times of financial need. It serves as a cushion against missed paychecks or higher than normal expenses.
Tapping into credit cards or other debt typically comes with interest payments and selling stocks or other assets at inopportune times can trigger taxes or fees. That’s why having a liquid emergency fund an important part of a household’s asset allocation.
A general rule of thumb is that people should try to have 3-6 months’ worth of expenses stashed away. Every household is different, so you may need a different number.
For example, if you have a large household and/or are a homeowner, you may need a bigger emergency fund. Someone in your family could get sick, your car could break down, your home’s water heater might break and need to be replaced, and so forth. Having some extra money beyond just three months’ of expenses would be helpful in this scenario.
If you have a small household and are a renter, your lifestyle may have fewer potential expenses that could come up. You should be able to get by without a few paychecks and repair a car or cover healthcare fees as needed, but you won’t have to worry about big unexpected home repairs.
At the very least, having money set aside reduces your financial stress and helps you feel financially free.
How to Build an Emergency Fund
It can be very challenging to build up savings, especially for people in the lower half of the income distribution or that work in an expensive city. After taxes, housing, transportation, insurance, groceries, student debt payments, automatic retirement contributions, childcare, and other basic needs, there often isn’t anything left to save into a cash reserve.
There are two straightforward methods to build one that almost anyone can use.
Method 1) Develop a Side Gig
It’s not easy, but working a little extra on the side can help solidify your finances. It can be temporary rather than permanent; if you find yourself truly unable to save, then it’s time to try to bring in more income for a while.
Most federal employees and contractors can work outside of their main job as long as it avoids certain conflicts of interest and does not interfere with their primary work.
You probably have some skill that you enjoy that could bring in some extra cash each month. If you could make an extra $10/day on average, that’s $300/month to put into savings. It can also give your resume a nice boost.
For me, it’s always been freelance writing and website development. When I found myself nearly a decade ago as an entry-level engineer with $50,000 in student debt, I knew I needed more income to accelerate my debt payoff. It ways always fun to build websites and write about things I had passion for, and even as I became very financially secure, I continued doing it for fun.
Method 2) Have a “No Spend” Month
Making a permanent budget reduction is hard. We work so that we can have fun, so cutting spending on fun seems like it defeats the purpose of what we’re all here to do.
One way to make it more approachable is to do it in temporary bursts and make a game out of it. A “no spend” month is just such a game.
During a “no spend” month, you avoid absolutely all spending on anything other than the basics. No eating out, no new clothes, no new gadgets or movies, etc. But just for one month.
In addition to hopefully giving you a nice burst of savings to start an emergency fund, it gives you free time to work on your to-do list. You can go through your home, clean out closets, get rid of things you don’t use anymore, and perhaps hold a garage sale to bring in some extra money. In addition, you can read books, play games with your family, or do other virtually free activities to improve yourself or catch up on things you’ve been meaning to do.
When you come out the other side, the things you spend money on may feel even more meaningful to you, and you have extra cash for peace of mind as well as a good catch-up on your to-do list.