How quickly the mess in Washington this week moves from impasse to crisis to emergency to disaster to catastrophe depends on whether you are an observer or a participant.
People looking at the politics of the situation can use all of those words to describe the chaos that legislative stubbornness has unleashed across the country, but the 800,000-plus federal workers and government contract laborers now home without pay aren’t getting a civics lesson so much as a test of their emergency-finance system.
Studies have shown that nearly two-thirds of Americans say they live paycheck-to-paycheck; for them, a furlough, delayed paycheck, an uncovered medical bill or a retirement benefit check that arrives late could be a very real, financially destabilizing problem.
While those affected are in the early stages of dealing with the problem, the government shutdown should serve as a national warning that individuals need to stress-test their finances against furlough and layoff.
Everyone has a very personal way that the current government situation could become worse and hit home. While the shutdown doesn’t threaten Social Security payments, those could be under fire if politicians can’t get together to raise the debt ceiling before its upcoming deadline. A prolonged shutdown will have economic ripples that could cost people outside of the public sector their jobs, and more.
Nothing quite brings your personal financial circumstances into focus better than seeing whether they could get a lot worse with just a little bit of economic and political misadventure.
If you are a furloughed worker, you have no choice but to see your finances put to the test. For everyone else, commiserate with the affected workers by feeling their pain, because in today’s economy, there’s a decent chance that layoffs, furloughs, forced early retirements and more could be in your future.
So, as long as the budget impasse persists, set your own paycheck aside untouched, as if it never came, and see how long you can go without a paycheck before you feel the pinch, before it feels like you’re in crisis mode, or worse.
If you can’t miss a pay period without feeling pinched or racking up debt, you need to get a handle on where the money is going, and think about how to change your habits so that long-term financial discomfort is not inevitable. Considering how many people need their next paycheck to pay the bills, missing a full check is surprisingly likely to feel like a panic.
With that in mind, as you stow the paycheck — putting it into an emergency fund if you don’t have one and can make it through a pay period or more without it — consider the following questions:
• Are my resources sufficient to weather real problems that last longer than this test? If missing a single paycheck has you feeling tapped out or worse, you don’t have a sufficient cushion. The wrong time to find that out is when the next headline has a direct effect in your house.
• How do I avoid the problem? Political change — if you could throw the bums out — doesn’t guarantee improvement; only increasing your savings does. Change some habits, find ways to squirrel away bits of money and let time work for you; then, the next time there’s some crisis caused by Washington — and there’s always another one — you can do this same exercise again and measure your progress.
• If I can survive without one check, what’s stopping me from increasing my savings? If missing a few days of pay doesn’t stress your ability to pay the bills, then nothing should be standing in the way of increasing your retirement or emergency set-asides. Further, the headlines coming out of Washington should be additional motivation to protect yourself.
Think of your layoff plan as a decision about which expenses get a spot in your financial lifeboat.
• What could I do without, financially speaking, before damaging my quality of life? Review where your money is going; tally up all bills due, plus all regular expenses; without money coming in, consumers must reconsider everything they are paying for.
That tracking of spending should leave behind a list that can be broken into priorities, necessities and niceties. Examine that list to see what you would cut if you went without pay for 7 days, 30 days, 60 days and so on. Look for places to save money, cut expenses and improve your standing.
You have to pay the utility bills, for example, but you might save money by bundling services, cutting usage and more. That’s an easy first cut; eliminating services altogether comes only after a crisis has lingered.
Don’t just look at your spending. Consider how you pay the bills, and what you would do to maintain a good credit rating even at a time of financial stress. You will want to pay bills on time but might consider paying just the minimum. Don’t be afraid to call creditors to set it up so that your heaviest bills are not all due at the same time of the month, making it easier for you to weather small storms.
“If you don’t just watch the news but think about how you would get through something like this, then this is a good test for your finances and your risk tolerance and your ability to get through a disaster,” said Rui Yao, assistant professor of personal financial planning at the University of Missouri. “There’s always some problem, and it always affects someone. You should be thinking about what would you do if happens to you, so that you can be prepared when it does.”Chuck Jaffe is senior columnist for MarketWatch. He can be reached at email@example.com or at Box 70, Cohasset, MA 02025-0070.