As we write this article, the federal government shutdown just ended. The shutdown lasted 35 days with nearly 800,000 federal workers not being paid. Federal workers weren’t paid on Jan. 11 and then missed another paycheck Jan. 25, the day President Donald Trump signed a bill to temporarily end the shutdown. As if this weren’t bad enough, about 10,000 federal contract companies — and their employees — were out of work, and unlike federal employees, many contract employees had no hope of ever being paid for their lost work days.
Many media stories detailed the financial hardships of those who had run out of money; they were struggling to pay rent or mortgage payments, to make car payments and even to come up with enough money to buy food for their families. There were even reports of those affected by the shutdown showing up at food kitchens. The shutdown was not their fault; unpaid workers were the pawns in a political battle to determine which side would blink first.
In contrast to the seemingly cold-hearted politicians, this sad event brought out the best in some American citizens; many people and organizations tried to help. Several banks announced payment amnesty for affected workers who could not make their debt payments. One bank even increased checking account balances by the amount of their missed paychecks, the same as if the employees had been paid. Several restaurants offered free meals to federal employees who showed their federal ID cards, and many cities coordinated activities where charities, private companies and concerned citizens could donate food or money to help their residents who were struggling financially. All this because unpaid workers missed just one month of income.
There is a hard financial lesson for these employees, and for that matter, for the rest of us, to be learned from the shutdown. As the Boy Scouts motto states, “Be prepared.” Financial advisers have been preaching for decades about the need to keep three to six months’ worth of unavoidable expenditures on hand in case a sudden, unexpected need pops up.
What’s an unavoidable expense? Spending you cannot avoid without getting into serious trouble. For example, we have to make our debt payments every month. So add together payments for car loans, student loans, mortgage loans and so forth. Toss in your credit card payment to this total; after all, incurring debt isn’t an ideal solution for lost income. Then add in basic needs such as monthly grocery expenses, utility payments, insurance payments and so on. You get the idea. Add all expenses you cannot avoid. Then multiply this monthly total by three to six.
The multiple is three if your spouse also works, bringing in a second income, thereby reducing the likelihood both of you will lose your incomes at the same time. On the other hand, use a multiple of six if you are both federal employees.
Also use a multiple of six if you do not have adequate insurance coverages, have high insurance deductibles, have children, have unstable income (for example, your income is from a monthly commission), or work for an employer with high employee turnover. If the opposite of these conditions applies, you likely can get by with three months’ worth of disposable income set aside.
What exactly does “set aside” mean? It means it’s somewhere safe and easily accessible. The rate of return you earn on your stashed reserve is not too important. Instead, safety dominates the investment choice. That means your money should be in a bank account, checking or savings. But whichever account you choose, you will have to guard against the urge to spend it.
It’s rather obvious the federal workers we saw in news reports who were in tears because they did not have enough money to buy groceries violated this simple and well-known three-to-six-month rule. We shouldn’t be too hard on them, however. It’s human nature to spend and spend it all no matter how much income we have. How many times have you heard about people who win huge lottery payouts and then blow it all? Did you know that around 85 percent of all retired National Football League players eventually file for bankruptcy? That percentage is only a little higher than in other major sports. Here’s the point: Except for those with very low incomes, it’s more about developing the discipline to not spend than earning more and more money.
Spending is pleasurable while saving is painful. Saving requires us to deny the pleasure we get from spending. Perhaps about 30 percent of adults in the United States have what is often called a genetic saver’s gene. They have saved and invested since they earned their first dollar. Financial advisors seldom worry about the well-being of these individuals. It’s the remaining 70 percent who get into financial problems. In the grand scheme of things, they are normal people because they account for most of us. It’s the genetic savers who are the outliers.
If you do not have three to six months’ worth of your unavoidable expenses set aside, start working on it. This rule trumps investing in your 401(k), putting money aside for vacations or almost any other use for your “extra” money. Yes, it’s very difficult to set aside the money and not touch it, but you will be doing yourself a huge favor. It’s about priorities.
Gregg Dimkoff, Eric Hoogstra and Angela Zondervan work in the finance department of Grand Valley State University’s Seidman College of Business.