The possibility of a federal shutdown underscores the validity of a personal emergency fund. Do you need an emergency fund?
- If you are living paycheck to paycheck, you need one.
- If you are maxing out your FERS contributions, you need one.
- If you have paid off your home, you need one.
- Even if you are retired, you need one.
The size of an emergency fund depends on your financial situation, expenses, lifestyle, and debts. Most financial advisors recommend you have financial resources to cover three to six months of expenses. Suze Orman suggests you save enough to cover up to 12 months of expenses.
A Federal Reserve survey found that more than one-fourth of Americans could not cover a $400 expense with cash or its equivalents.
Federal employees share all the vulnerabilities of any workforce in having their cash flow interrupted by forces beyond their control. A recent article by CNN highlights that reality. CNN also offers an overview of federal shutdowns for the past 40 years.
The longest federal shutdown was for 35 days. That is well within the guidelines recommended in the financial planning field. Yet some federal employees were financially fragile enough to suffer.
If you are a federal worker, you may not be aware of the growth of your expenses. Budgeting can be used as a tool for identifying known expenses, but even with a budget, new expenses occur. I have never seen a personal budget that includes accounting for future inflation.
A single person with no children who constructs a budget and sets aside a few dollars for an emergency fund may discover that a few years later her or his projections are now outdated because of
- a spouse
- a child
- another automobile
- a house or larger apartment
- a medical expense
- an education
- and other lifestyle changes
So, if you have a dated budget that accounts for expenses and an emergency fund you might want to add the current expenses (with current inflation) and the emergency fund (with current inflation) together to determine how much you need to weather the prospect of a federal shutdown.
For information on how to approach a budget consider this Investopedia article, What is a Budget? Plus 10 Budgeting Myths Holding You Back and to keep your emergency fund just for emergencies see my FedSmith article, Keep Your Emergency Fund Out of Sight to Forget About It
