Use a financial fire drill to prepare for the worst BEFORE it happens

Hey, federal employees: How many of you were you watching the Countdown to Shutdown clock and wondering how you'd cope if salaries were delayed by even a few days?

The time to figure out how you would have managed was before the crisis loomed. The same goes for any non-government workers living paycheck to paycheck. What if something happened to delay or (heaven forbid) curtail those checks?

You can't predict illness, layoff or your employer going out of business. But you can prepare for these contingencies with a financial fire drill, i.e., getting a clear idea of baseline expenses and creating a plan to cover them with available funds.

Initially, the idea is about as pleasant as a colonoscopy: You know you should, but you're a little afraid of what you'll find out. What if we can't make it on one salary? What if we're doomed? Actually, knowing what your survival budget looks like is incredibly reassuring. It's a playbook for tough times: If worst comes to worst, we could manage on as little as $X.

A friend once told me if layoffs came she'd probably be in shock. Having a plan in writing means she could shift into survival mode rather than spin her wheels. You should be prepared, too. Do this now, before one of those contingencies lands on you like a ton of unemployment paperwork.

What Do You Need to Get By?

A financial fire drill is not the same as tracking your spending. This time you'll be tracking how much you can avoid spending on food, shelter, utilities and debt service (e.g., student loan or mortgage). The idea is to meet these basic needs in a basic way.

“Basic” means exactly that. Prepare to be temporarily ruthless. Consider these cost-cutting strategies/resources as a starting point:

  • Food. Call an ironclad moratorium on meals out; instead, go online for inexpensive and imaginative recipes based on what's in your personal food bank plus a shopping list that lets you eat healthy on the cheap. Institute a Meatless Monday. Look up ways to glean or forage — even in the city. Familiarize yourself with local food banks and how to apply for food stamps and/or WIC; links to these resources (and other helpful strategies) can be found in “Unemployed? Underemployed? Here how to get help.”
  • Shelter. Decide whether you could take on a boarder or roommate and search online now for rental contracts you can download for free. (Trust me: You'll want it in writing.) Research cheaper neighborhoods just in case the hard times linger. Doomsday scenarios: Make yourself available as a house-sitter; sound out friends and/or relatives about short-term lodging, e.g., a week in each place. (Don't just assume that people will take you in. If they can't or won't, better to know it now.)
  • Utilities. In the winter, dress in layers and lower the thermostat; in summer, open the windows and turn on a fan. Reduce cable/cell plans or drop them outright if you're not under contract (and maybe even if you are — see if it's cheaper to pay the penalty than play out the contract). Nix Netflix or online gaming. (Bonus: Reducing TV/computer use will lower your electric bill.) If you must have Internet, locate the cheapest kind. (Yes, it'll take longer to load. Do you want to eat or don't you?)
  • Debt service. If you make extra mortgage or credit-card payments, stop. Get details on student-loan deferment or forbearance so you'd have all the info needed to apply. Quit using credit cards so debt doesn't grow any worse.

Add up the bare-minimum costs. Now you know what you need each month. (Hint: Not want. Need.)

Should this budget ever be implemented, it'll be a shock. You and your spouse/partner (if any) may hanker after the good old days of lunches out and mani-pedis, while offspring (if any) moan about the lack of Pokemon cards or ballet lessons.

You'll all live.

What Available Funds?

Now that you know the size of your bare-bones budget, it's time to figure out how to cover it. If you got laid off and were eligible for unemployment — remember, not everyone is — you might be startled by the amount you'll be given:

  • The average unemployment check is $295.
  • The average weekly salary it replaces? $865.

That's a huge blow to your budget even if you have a spouse/partner who's employed. How long would you be able to pay the rent and keep the lights on?

This is why building an emergency fund is so important. It may not be easy. Maybe your salary isn't keeping up with inflation (whose is?) and your family's needs are growing. Maybe you think there's nowhere left to cut. Maybe there really isn't.

But be honest: Is there really nowhere left to cut, or are you simply unwilling to do the hard work of temporary self-sacrifice?

As a Bulgarian PF blogger named Rya wrote in a recent guest post, “tough or not, you have to do it.” Sometimes life requires a little discipline and, yeah, doing without. In other words, short-term sacrifice for long-term security. Welcome to adulthood. It isn't always fun.

My GRS post on the subject — “Think you can't afford an emergency fund? Think again!” — offers tips for squeezing a few dollars here and there. Keep at it. The fund will grow. You may not even need to use it if you've got a partner with a salary and also one or more…

Alternative Income Streams

Personal finance blogs are abuzz with advice on making more money. Keep in mind that an alternative income stream does not necessarily mean Internet-based income. You probably can't start a website and instantly derive a small fortune in passive paychecks.

What's more likely is a part-time job in the real world, such a couple of nights a week clerking at a convenience store or delivering pizza. These jobs may not be as easy to find as they used to be, given the economic downturn. If that's the case in your area you could brainstorm other ways to bring in extra cash, such as:

  • Sell stuff. Make a list of possessions you could sell via Craigslist, eBay or the bulletin board at your local supermarket.
  • Do odd jobs. Put the word out that you're available for babysitting, dog-walking, cleaning out garages, defragging computers or whatever you're good at. (Note: I get paid $10 and up per hour to babysit — including the hours when the kids are asleep and I'm lying on the couch reading.)
  • Donate plasma. It's time-consuming but can pay surprisingly well.
  • Make your own job. Find a need and fill it. I once interviewed a college student who did chores for super-busy people: shopping, picking up dry cleaning, helping set up parties, etc. Another woman told working parents that she'd walk their children to school along with her own, and got paid $5 per kid per day to do it.

Look around. You might be surprised at the opportunities you'll find. Heck, I once got paid $35 to watch a short porn film — all in the name of university medical research!

Incidentally: These could be ways to build up that EF right now.

Making Prudent Choices

Now is also the time to clean up your act if you have consumer debt. Stop using your card(s) and work toward paying off your obligations. It is never a good idea to carry a balance — and if things got tough, that balance will become just another worry.

Note: The above tips are not one-size-fits-all. I know from personal experience that consumer debt could be unavoidable due to, say, medical or legal issues. I know that if you already live close to the bone then a bottle of beer or a once-a-week movie are small luxuries that make huge differences.

But I also know this: If you suddenly faced a drastic salary reduction, you'll be awfully glad you did a little advance planning.

Dealing with illness or job loss is hard enough. Having a game plan will let you make prudent decisions at a time when shock leaves you vulnerable or terrified.

More about...Planning

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Kate
Kate
9 years ago

This might be a little off-topic, but I’m genuinely curious.

Is it true that non-excepted federal employees would not have been allowed to take additional employment (like a part-time job) in the event of a shutdown?

The Washington Post FAQ article on the shutdown seemed to indicate that was the case. I have to admit, as someone without a dog in that fight, I was really taken aback by that. Seems kind of like tying one hand behind their backs.

I assume said employees could still use some of the tips Donna outlined, like babysitting and selling plasma…

Meg
Meg
9 years ago
Reply to  Kate

I’m a fed, and I do know that we are not allowed to have any outside employment without special permission. I think that this would remain in effect even during a furlough. We would be allowed to receive unemployment checks if we were furloughed (which would have to be repaid if we got backpay).

Mirrie
Mirrie
9 years ago
Reply to  Kate

Active duty military is also not allowed to have second employment without “command approval.” I suspect the likelihood of that being enforced during a prolonged shutdown is slim, but strictly speaking, if you don’t have the job approved before the shutdown, you’re out of luck.

Amber
Amber
9 years ago
Reply to  Kate

I too work for federal government, and I am sure it varies depending on your status, but our memo laying out the ethics of furlough reminded us that we were still subject to the same conflict of interest rules we are always bound by. That doesn’t mean I need approval to go get a job at Starbucks. I just would need (and likely would not obtain) approval to work as a consultant to a lobbying firm in my area of expertise, or some other conflict of interest situation. We are also always barred from working or volunteering on a political… Read more »

SF_UK
SF_UK
9 years ago

This all sounds like great advice.
The next step in doom-planning is the long-term one. What will I do to replace that income stream? Again, thinking about this in advance is better than panicking when you get that “sorry we’re going to have to let you go” interview.

El
El
9 years ago

Thank goodness I got my act together a few years ago and could last 7+ months on my emergency fund if I had to. I was hugely surprised that we were found ‘essential’ though. That meant that we would have worked without pay until Congress had an agreement and then gotten paid at that point, instead of just not being paid at all. As far as getting another job, that requires prior approval and paperwork, so if you don’t already have the official okay, it’s too late. Taking a side job without permission can be cause for termination.

Hunter
Hunter
9 years ago

It’s ironic that we think of government jobs as being the most secure and this lures you to believe that you only need a small emergency fund, if any at all. A real budget crisis should be a wake-up call to everyone that here is no place to hide in this fragile economy. Wait until the oil shock hits. Who is preparing for that?

Diane
Diane
9 years ago

Yes, you MUST have internet if you can possibly manage it. My husband was recently out of work for a year, and spent every single morning, 4 hours, searching for and applying for jobs. (We recommend Indeed.com as a good job site) Many applications, particularly federal ones, have essay questions, and they can take hours to complete, longer than the time limit at our library. Many of the companies/universities only accept applications by email. Internet also makes it much easier to do research on the companies to which you’re applying, and on agencies that can help you with your finances… Read more »

Nicole
Nicole
9 years ago
Reply to  Diane

Good advice.

Jaime B
Jaime B
9 years ago
Reply to  Diane

If you have a laptop, you can get around the library time limit by accessing their WIFI directly. I also found that at least one of my local library’s locations you can still access their WIFI from the parking lot, after hours (I figured that in order to cover the whole building, it probably spilled over into the parking lot and I was right! 🙂 I also tested to see if they turn it off when they’re closed and they didn’t.). If I absolutely had to cut my internet, I could and the biggest effect would be that I couldn’t… Read more »

getagrip
getagrip
9 years ago

Well, it isn’t over for federal employees until the bill passes house and senate and the president doesn’t veto. I’m not holding my breath or thinking we’re out of the woods yet. I think this is a good article. I tend to think that unless you’ve been through an unexpected job loss or layoff and really learned from it, it can be hard to cut back initially and have that plan. What I’ve typically seen is people hold off on spending for larger items, but tend to be optimistic and keep paying on other things in a normal manner as… Read more »

Angie
Angie
9 years ago

This is something I have been doing lately on my own. I don’t want to have to figure it out on a (horrible) moment’s notice. We have the opportunity to plan ahead now. There is no reason not to take advantage of that.

elena
elena
9 years ago

I need to revise our emergency plan. Our circumstances and needs/wants change. This is a timely message. When I lost my job last year, I had about three weeks notice, a severance package, plus was eligible for unemployment. Better than I expected. Still there was a six week delay in both unemployment and severance and it took several months to get even a part time temp job. Having a one income plan in advance made everything easier. We didn’t have to make most of the proposed cuts b/c of unemployment. Severance allowed me to consider transitioning to a different career.… Read more »

Jeff
Jeff
9 years ago

My biggest fear is that I’ll end up like a 99er sometime down the road (way too many friends and relatives being told they’re “overqualified”), so my emergency plan is designed to last for a very, very long time. I’m “fortunate” that I don’t have a family to support, so I’ve at least got mobility and relatively low-cost living working in my favor.

Tyler Karaszewski
Tyler Karaszewski
9 years ago

My plan for this sort of situation is very simple (which doesn’t mean it’s easy to do). Here it is in its entirety:
Orange Savings Balance: $38,531.71

Ms. K
Ms. K
9 years ago

OK Tyler…that looks pretty good. How many months of necessary expenses will that cover for you?

Mom of five
Mom of five
9 years ago

I used to feel that having a large bank balance was all we needed. Then we got socked all at once with more than 20k in emergency expenses (primarily medical). The best surgeons, it seems, are “all out of network” – that means insurance pays 50 percent of what it considers fair and equitable, or about 600 bucks of a 10k bill – yikes! It scared us straight. We now have about double what you’ve got in your ING, but we still feel woefully underfunded – our normal comfortable monthly expenses (minus luxuries like eating out, etc, run us about… Read more »

Tyler Karaszewski
Tyler Karaszewski
9 years ago

At my current required monthly outlay, that’s good for about 15 months of minimum expenses without having to cancel anything like cell phones, but also assuming we’d stop going out to eat and stuff like that. It’s probably more like 6-8 months of “normal” spending, but a lot of that isn’t really necessary. As long as I keep my current job (and its associated health insurance) then nothing is “out-of-network” (I have the best health insurance I’ve ever seen). Obviously, in a worst-case scenario, that may not be the case — I could lose my job and get cancer the… Read more »

First Gen American
First Gen American
9 years ago

I can happily say that I finally feel like we would be okay…although it took almost 15 years in the workforce and saving to get that way. I’ve never really been that good at keeping cash hanging around. I’d always want to put it towards loans or a house renovation. The main scary part for me is the cost of self insuring myself for healthcare and life insurance. I take those costs for granted because it gets taken out of my pay every week and I don’t really think about the out of pocket costs I’d have to add if… Read more »

Donna Freedman
Donna Freedman
9 years ago

@First Gen: I pay $349 a month for health insurance through an HMO, and feel lucky to have coverage at all. No machine runs for more than 50 years without some maintenance issues so I don’t dare drop it.

Dan
Dan
9 years ago

A lot has happened in my life over the last two years. My originally planned e-fund hadn’t materialized, as many un- (or poorly) planned expenses got in the way. But as of today (and no, this post had nothing to do with it… it’s just a coincidence), the major obstacles are out of the way. I’ve paid off the last of my consumer debt, and can really start saving with gusto. My plan is to build a $15-$20k cash emergency fund by the end of 2012. This represents 5-7 months of expenses. And yes, if I stick to my budget,… Read more »

Dean Burke
Dean Burke
9 years ago

Why does it take hitting rock bottom to get people to change behavior even they know is wrong?

Answer that question and find a solution-the world will be at your feet.

Good reminders for all of us.

Jennifer
Jennifer
9 years ago

We are in the process of facing a potential salary crisis, what with teacher and budget issues so rampant in OH these days. My husband is a teacher. They just let dozens of people go from his district. Things could drastically change, paycheck wise, in the near future. Currently we are trying to figure out back up plans for everything. We have always had a rough draft so to speak, but if he were to get laid off, there is no district in OH that is going to be hiring in the coming years. They are almost all cutting, and… Read more »

retirebyforty
retirebyforty
9 years ago

I’m taking 3 months bonding leave to spend time with our baby. This give us an opportunity to test drive our emergency budget. We’ll see how the cash flow look and see if we can make it on one salary. I know we are a bit short, but we’ll see how much exactly. We do have emergency saving so we should be pretty good for a while even if one of us lose a job.

Steve
Steve
9 years ago

Since 2005 (the last time I got laid off), I’ve maintained a “survival budget” on a separate spreadsheet tab right next to my regular one. It lists the bare essentials (housing, food, utilities, health insurance, etc.) and their associated costs. It also lists the expected cash flow that I would be getting from unemployment and/or personal savings in the event of another job loss. The key here is that I’m always revising this plan as my life situation changes and making sure that whatever happens, I can at least live indefinitely on the basics. So when I got laid off… Read more »

Donna Freedman
Donna Freedman
9 years ago
Reply to  Steve

@Steve: Yours is exactly the kind of example that will help other readers. You prepared, the worst happened and you coped. It wasn’t easy but you did it. Kudos, sir.

Rosa
Rosa
9 years ago
Reply to  Steve

What a great idea!

I only update my emergency budget when I’m thinking about quitting my job. I might start an extra tab for this, that imports from my regular spending tracking.

Our medical costs have gone up hugely recently, just the copays. I think my last plan dates from when all I had to worry about were annual checkups.

April C. Harris
April C. Harris
9 years ago

This is great everyone (global america) should read this! I tweeted this also to my followers, thanks my brainy friend!

Scott Messner
Scott Messner
9 years ago

Selling stuff is one of the quicker and easier ways to generate cash. Sell things you do not use anymore or are sure you can do without.

I do not see the economy affecting convenience store or pizza delivery jobs in my area. My local convenience store is always hiring.

Emily
Emily
9 years ago

When I was laid off, my utility bills went way up because I was home during the day instead of at work. I made up for it by dropping the unlimited metro card, though… because, again, I wasn’t going anywhere. Sigh.

It’s good to have a plan in place. I’d especially recommend familiarizing yourself with the unemployment claims process in your area, for starters. If you’ve never had to access social / public safety net services before, navigating them can be daunting.

Amy Saves
Amy Saves
9 years ago

Being on unemployment is a huge cut in your paycheck and lifestyle, but think about life without it. I’m thankful it was around when I needed it.

good tips on selling stuff and doing odd jobs. gotta love ebay!

sjw
sjw
9 years ago

Emily – interesting point. I suppose I could plan to spend the vast majority of my day at the library, but realistically, I need to assume higher hydro and gas in that scenario (and my retirement scenarios too).

Ginger
Ginger
9 years ago

My fiance and I are lucky, if his professor (PI) cannot pay him, the department has agreed to as have the college so we have quite a few stopgaps as well as having a renter. However, planning for the worst is always the best idea. The link below is an EF post for college students which emphasizes a plan over cash saving because most students cannot save up much cash (living partly on SLs).
http://frugalstudents.blogspot.com/2010/05/emergency-funds.html
I’m glad to see others thinking about plans not just money in regards to emergencies.

El Nerdo
El Nerdo
9 years ago

I really like Donna’s posts– last time it was about preparing for an emergency in case of catastrophe when you can’t have access to money, now it’s preparing for an emergency when you run out of money but the world is still functioning. It’s a sensible progression. About this latest scenario: I’ve been there already. It was early 2009 and my non-profit clients died at the hands of Bernie Madoff & a bad economy. It was a bad time to save because I had been putting all into growing my tiny business (risky, yes, but that’s life), and while the… Read more »

Donna Freedman
Donna Freedman
9 years ago
Reply to  El Nerdo

El Nerdo: You kick emergency-prep butt. And I mean that in the nicest possible way.

Mike B.
Mike B.
9 years ago

We went through this exercise while my employer was doing their first-ever layoffs a few years ago. The discovery of just how exorbitant our COBRA payments would be was an unpleasant one — roughly 20% of our “rock bottom” budget.

Donna Freedman
Donna Freedman
9 years ago
Reply to  Mike B.

@Mike B: My current health insurance, through an HMO, is 25% of my rock-bottom budget. Sigh.

Amber
Amber
9 years ago

Not sure if anyone read the NYTimes Room for Debate today about saving during a time of low interest rates. It is called ‘The Sorry Lot of the Risk Averse Saver’

Sorry Donna, this is only marginally related to your post, but I would like to see some GRS replies to these talking heads.

Justin
Justin
9 years ago

I think its interesting how big a deal some people make out of saving money. I guess its because they’ve never really bothered learning how? I dunno.

Every day I meet someone- sometimes 25, sometimes 55- who couldn’t survive for a week or 2 without their paycheck. Its completely amazing to me, because nothing- NOTHING- in this world is guaranteed (besides death of course!)

I like that you pointed out that even if its hard, JUST DO IT. Life isn’t easy, but a lot of people haven’t grasped that concept yet I s’pose.

Chris H
Chris H
9 years ago

Fantistic advice! Depressing as all get out to many I fear, but hey, better to get that kick in the pants from a drill than the real thing, no?

Pat S.
Pat S.
9 years ago

Like some of the other readers, I had my own version of a fire drill during the past week, when the government threatened to shut down. I was pleasantly surprised at our family’s response. We’ve definitely come a long way.

JGD
JGD
9 years ago

I’m a federal employee that works for a working capital funded agency. That means that as long as our agency had cash in the bank, we could continue to work. http://www.opm.gov/furlough/faq/ provides definitive guidance on the impact of a furlough. This was the first time I actually did anything to prepare for an “emergency.” I found that I could survive about 5 weeks without a paycheck. I was shocked that I could survive that long! I hadn’t even realized I could. I thought I was going to be dead in the water. I made arrangements with my credit union for… Read more »

Mirrie
Mirrie
9 years ago

I love this idea! We’ve built up an emergency fund that would cover about 6 months of normal expenses, but I never thought to do a drill like this –will definitely be taking a look at that soon. Both my income and my husband’s would have been knocked out by a shutdown, and thanks to some advanced planning, we were actually looking forward to some guilt-free time off. I was horrified at how many of my coworkers, all of whom earn very comfortable salaries, were in a state of panic about missing even a couple days’ pay. The sad part… Read more »

Susan
Susan
9 years ago

The industry I work in has been going through downsizing for the last three years. The only thing that has kept me sane has been the knowledge that if I was cut tomorrow, I would be fine for a very long time with the emergency fund that I have, and I wouldn’t mind cutting expenses drastically. I have been holding a very large emergency fund through out this time just in case, and not using that to upgrade my car or housing situation. Both are fine for now and I prefer the security.

LifeAndMyFinances
LifeAndMyFinances
9 years ago

My wife and I ran through this drill about 6 months ago, and we’d last about 7 months without any unemployment checks. But, that was when we were still in debt and had a very little emergency fund.

Currently, I suspect that we could last over a year. We have some money saved up (for a house purchase, yay!), and we have quite a few assets. Plus, I have a bicycle that can take me pretty much anywhere! 🙂

PB
PB
9 years ago

This may sound really dumb, but —

I have always paid ahead on every loan, and just tracked my own schedule to see when they would be repaid. Recently, a bunch of the kids’ educational loans were sold to another company, so I looked at them really hard and found that the “next payment” due on all of them was well into 2012! If I had to, I could stop paying altogether on these during a crisis and still not be in default! An added benefit of trying to get out from under early!

Peggy
Peggy
9 years ago

The advice to quit using credit cards is especially good. Too many people consider available credit to be as good as having a real emergency fund. Credit cards are ok for discrete emergencies, like car repairs, but living on credit for an indefinite length of time is almost certain to be financially devastating.

Tara C
Tara C
9 years ago

I had no idea how much unemployment paid – the good thing is I am currently living on less than that so I guess I would be okay. My emergency fund is not yet where I want it to be, but I could hold out for approximately 8 months on what I currently have, not counting all the stuff I could sell on ebay (which is quite a lot).

lisa
lisa
9 years ago

We learned a ton when my DH lost his job the first time. We had a newborn and toddler and I worked part-time for minimum wage about 20 hours a week. He didn’t get a severance pkg. Finding a job was tough. I tried to work more hours but wasn’t always successful. We learned the following: 1) Find a job. Any job. It keeps your mind busy and makes you feel like you’re doing something worthy. 2) Don’t be too proud to apply for food stamps. He yelled at me when I applied but after a few weeks, he didn’t… Read more »

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