The recent 35-day government shutdown was the longest on record. The level of financial stress endured was not easy for federal workers and contractors. But at the same time, the shutdown showed us all that many Americans are just a paycheck away from financial ruin.
It was also an eye opener in that we can all benefit from building up savings and planning for unforeseen circumstances, like an unexpected job loss or family crisis. Here are nine money lessons learned from the recent government shutdown.
What to Do in the Middle of a Financial Crisis
Notify your landlord and other creditors right away
Be sure to communicate with all your creditors (student loans, credit cards and utilities) to let them know of your current status. Most will appreciate the heads-up and be willing to work with you to come up with flexible payment terms. For instance, during the government shutdown, many credit unions offered interest-free personal loans to federal workers.
Go down to a “bare bones” budget
When faced with any financial crisis, one of your first action steps should be to cut out every expense that isn’t an absolute necessity, such as eating out or getting your hair done. This is also the perfect time to do a pantry cleanout. You can do this by getting creative with the items you have on hand before you go to the grocery store.
Find ways to earn extra cash fast
Believe it or not, there are many ways to make extra cash in a single day. One of my favorite money-making activities is selling items around the house that I’m no longer using. Last month, I decluttered my closet and made a cool $50 at a consignment store. Another idea is to sign up for the Next Door app. This way you can find extra income opportunities in your own neighborhood, such as babysitting or landscaping jobs.
(Temporarily) hit the brakes on your debt free journey
Diana Farmen, a middle school teacher and founder of Diana on a Dime, had direct experience with the shutdown as her partner was furloughed. Farmen says it’s important to hold off on making extra payments on your debt, even though it can feel discouraging. She explains that “since it’s hard to know how long a government shutdown will last, you’re better off paying minimums for the time being and hoarding your cash until it is over.”
Use your HSA as another buffer
Did you know that a Health Savings Account (HSA) can also function like an emergency fund for non-medical expenses? If you do have an HSA, it’s a best practice to fund it fully every year and keep all of your medical receipts.
According to CNBC, “if, say, a $500 emergency crops up and you have receipts for $500 worth of unreimbursed medical outlays handy, submit those receipts to get a $500 check from your HSA to pay for that unexpected non-medical event.”
Think carefully before borrowing money from your retirement plan
Mary Beth Storjohann, CFP® and founder of Workable Wealth, says that if you have no other sources of cash reserves, borrowing from a retirement plan can be an option but “only if you plan to be diligent in repaying the funds as soon as possible.”
Storjohann also explains that some retirement plans like your 401(k) may provide for penalty-free withdrawals if you can prove hardship, or you can also take a loan from your 401(k) with the intent to pay the money back into the plan. She prefers the latter option as “you’ll be paying yourself back instead of a creditor and you also won’t be locking in the withdrawal.”
How to Safeguard Your Finances Against Future Crises
Spend your back pay wisely
When the U.S. Congress approves back pay for furloughed federal workers, it means that when the government reopens, your paycheck will be bigger than normal. It is understandable that after having to tighten your purse strings for an extended period of time, you would be excited to splurge. Or, if you had to borrow money from a family member or elsewhere, you may want to pay them back right away. However, you should also set aside at least some of the back pay and put it toward your rainy day fund.
A fully-funded emergency fund gives you peace of mind in the event of another government shutdown or any other financial crisis. How much you need to save in your emergency fund will depend on your own personal circumstances. For example, if you have kids, your emergency fund will most likely need to be bigger than if you are a single person with a roommate. Your e-fund should be separate from your checking account but still easily accessible.
Pro tip: Once you have a separate savings account, you can sign up for automatic contributions from your checking to your savings every time you get paid. With a Chime Bank account, you can automatically save 10 percent of your salary and use it for your emergency savings. If that’s too high, you can create a salary deduction for five percent of your paycheck. The key is to start somewhere and build from there!
Keep on living below your means
Living below your means is something you can always do – not just during a crisis. In fact, spending less than you bring home is an important key to building wealth. Plus, just like having an emergency fund, you’ll feel a lot less stressed knowing that you are no longer living paycheck to paycheck.
Create multiple sources of income
This recent government shutdown shows us that it is no longer practical to rely on a single source of income.
“Having multiple streams of income is one of the best ways to prepare and safeguard against unforeseen circumstances. If you’re laid off, need to take a leave of absence, or part of something like the most recent government shutdown, you will continue to have income coming in. Not only that, but you’ll likely feel better, be less stressed, and be in a good position to adjust and move forward, despite any setback. If you only have one income stream, the shock of that income getting cut off may be hard to bounce back from, not to mention the immediate financial hit you take,” says Natalie Bacon, JD, CFP(R), Certified Life Coach at NatalieBacon.com.
If you were affected by the government shutdown or find yourself in another financial crisis, fret not. While things may seem stressful right now, there are steps you can take to gain control over your money. Once you step back and make some smart money moves, you can then find the peace of mind you need to secure your financial future.