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Five lessons from prepping for a furlough

A lot of federal workers are in fear of a furlough.

Congress has passed a temporary measure that will keep the government open for another week. Even still, there are lessons to learn from this latest budget skirmish.

Ask yourself: How prepared am I for a furlough, layoff or reduction in employment hours?

I don’t want you to manage your finances out of fright, but you’d be smart to play the what-if game to ensure that if the “what if” happens, you’re as prepared as you can be.

I remember well the last shutdown – 16 days in 2013. Many federal workers were sent scrambling because they didn’t have a savings cushion. As many as 850,000 individuals per day were furloughed.

And it’s not just federal employees who may be affected. Work by contractors, essential to federal operations, may be stopped. In the 2013 shutdown, to avoid missing a paycheck, some contract workers had to take vacation days. And unlike federal workers, many of these employees didn’t get back pay.

The shutdown “jeopardized both the income stability of hundreds of thousands of federal employees and their ability to focus on important agency missions that citizens rely upon each day,” according to a November 2013 report from the Office of Management and Budget.

We can all learn from recent events. Here are five things you can do to position yourself for a disruption in income:

▪ Cut expenses now. Don’t wait until you’re in the middle of a financial crisis to start controlling your spending. Even if you stay employed or you’re not furloughed, what have you lost by budgeting better? Nothing.

Take, for example, credit card debt. As the economy has improved, many people have gone right back to overusing credit. The National Foundation for Credit Counseling (NFCC) recently found an increase in the percentage of U.S. adults carrying monthly credit card debt.

▪ Save something. Thirty percent of adults have no emergency savings, according to a new survey by NeighborWorks America.

OK, you’ve got bills, and the recommendation of having three to six months of living expenses seems impossible. Then don’t set yourself up for failure. Start with just having enough saved to get you through missing just one paycheck. From there, build up to a larger cash cushion.

▪ Don’t be afraid to talk to your creditors. Don’t wait until you get behind before you call. Make pre-emptive contact to strike a deal if you think you might not be able to make a payment. Your creditor may not give you a break, but you'll never know if you don’t call.

▪ Don’t view your retirement account as an emergency fund. Perhaps you save in your retirement plan because there’s a company match. And yet you still don’t have a rainy-day fund.

You need both.

During the 2013 shutdown, 14,000 federal employees took hardship withdrawals from their Thrift Savings Plan.

If you have a choice between making your rent or mortgage payment and letting money sit in a retirement account you won’t access for many years, you’re probably going to go for the money. I get that.

But before it comes to that – as incentive to save – look at the impact of a withdrawal.

Smart401k.com has an “Early Withdrawal Impact Calculator” you should try out. It shows in real dollars the impact of not just a possible 10 percent penalty for early withdrawal but lost investment returns.

▪ Don’t be a bad borrower. The NFCC survey asked participants where or how would they get the money if they needed $400 for a financial emergency. Twenty percent said they would have to borrow it from family or friends.

I always caution people not to lend money they need back. Make it a gift, not a loan.

But if you need the money and the only way to get it is by agreeing to a loan, be upfront and honest about when you can pay it back. If the timeframe changes, call and explain the delay. Don’t be trifling and stop taking the person’s calls or get angry if he or she asks for the money back. Be honorable. You never know if you'll need that person’s help again.

You don’t have to be a government employee to prepare yourself for a furlough-like event. Get your financial affairs in order for a time when your paycheck might not come as you planned.

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