If you spend anytime on the internet, you've probably seen at least link to some article talking about Congresswoman Debbie Wasserman Schultz and her concerns about how the federal budget situation is affecting her staffers. I do understand that increasing costs and low wages are a serious problem for many people. However, I have very little sympathy for full-employed folks who have built themselves a lifestyle that they can't afford unless their income and costs remain the same. Preparing for surprises is what financial planning is all about.
I am going to rant a little, and please know that I am not directly aiming at 99% of you. But I am irritated. What is wrong with people in this country? You don't have to be a rocket scientist to know that having no savings and having monthly expenses that meet or exceed your current income is like building a house of cards in a room with three dogs and four toddlers. If you make $4,000 a month, and your monthly expenses are $4,000 (or more), what exactly do you plan to do if prices rise, or your income decreases? Don't tell me that your income will never decrease or your costs will never rise, because YOU DON'T HAVE A CRYSTAL BALL and life is not perfect. Stuff happens. Every day. Why would you choose to be dumb and not plan for it?
Situations like this are exactly why people like me spend our lives trying to encourage everyone to cut expenses, create room in your budget, and have some cash put aside for life's surprises.
Let's take the case of employees who are going to be subject to a 20% pay cut due to sequestration. While 20% is a lot, and is painful, people who are prepared will survive. What sort of preparation?
Living ExpensesLiving Expenses fall into two categories: fixed and variable. Fixed expenses includes stuff like mortgages, car payments, any other debt payments, insurance, utilities, and taxes. Variable expenses include anything that is a different amount every month: clothing, beer, eating out, hair cuts, shoes, babysitting, furniture, travel, home improvements, dry cleaning, kids activities, etc. Filling up your budget with fixed expenses is a bad idea, because you have no room to wiggle. Filling up your budget with variable expenses gives you more room to flex when circumstances need you to flex.
Emergency FundsSequestered federal employees are losing up to 22 days of work in calendar year. A regular work year is 260 days, as federal employees receive paid vacation. Therefore, these employees will lose about 8.5% of their work, and thus, about 8.5% of their pay.
While recommendations for emergency fund size vary considerably depending on wide variety of factors, three months expenses is generally considered the bare minimum for a well-funded emergency fund. This represents 25% of a year's expenses.
If you take an emergency fund of 25% of a year's expenses, and you use it to fund the shortfall of losing 8.5% of a year's pay, your funds should last at least three years. This is just straight line math and doesn't include the fact that expenses might not be as much as pay, or that expenses can be cut, or that the family could bring in other income to supplement the loss. Which brings me to:
Shifting Your Family's IncomeWhether you are a single person or part of a large, multi-generational family, each economic unit should strive to have a variety of stand-by income streams. No single plan will work for every situation, but options might include adding additional jobs, having a non-working family member start working, or doing whatever else creative needs to be done. The overall budget situation may mean that some of the ideas that have worked in the past might not work now, but there is almost always some way to create some sort of income when necessary. I have a friend whose family experienced a serious economic crisis last year. I was very impressed with her adaptability. Within a few weeks, they went from a family in which the father worked full-time and was in the military "part-time," with the mother working part-time, to a family where the dad was unable to work and the mom was working full-time, starting a side business, and trying to see if she could squeeze in a few shifts in retail. Was it fun? No. Did it save their family's home and keep them from falling into a financial disaster? Yes.
Really, Just Be A Little PreparedLet's take a hypothetical federal employee who brings home $60,000 per year, and who spends every cent of it. If sequestered for 22 days, their yearly income for 2013 will be approximately $54,900. Does it suck? Yes. Is it a disaster? Shouldn't be. First off, most of us could cut 10% from our expenses pretty easily. If you can't, you are stretched too thin. Second, even a scant emergency fund should make up the difference. And if you don't have an emergency fund? Well, then, think outside the box to find a new source of income. Use those 22 days off to start a business, sell your extra stuff on eBay, search for a less expensive home, or get a part-time job.
Well, this has gone to nearly 900 words, and I am still all fired up. I hope I haven't offended anyone. I know that there are people who have legitimate reasons why their budgets are out of whack, but those people are few and far between. Most people who find themselves in financial trouble have created the situation themselves. If me being mean helps you to see that you can take control over your life, that is awesome. Now go out there and have a super-duper, get yourself together kind of day.