Love & Money: How furloughed workers should recover their family finances after the shutdown
Sunny Blaylock is one of the thousands of furloughed workers whose life is on hold because of the partial government shutdown.
The Arlington, Va. resident is a federal contractor, and both she and her diplomat husband are missing paychecks while most of the government is closed. She intended to pay off student loans this month, but will have to delay that goal.
She’ll also have to cut back on saving for retirement and her children’s college funds. And although this is a time when most D.C.-area parents are arranging child care for the summer, she hasn’t yet. “You can’t afford to live here without two parents working, so you have to book in January and we haven’t,” she said. “I could, but I just don’t want to use our savings because I don’t know how long we’ll need to live off of savings.”
The 39-year-old mom of two, who is currently out of work while her husband works without pay, said she’s aware she’s more fortunate than others in this situation. Unlike many Americans , she and her husband have some cash savings to draw on.
The shutdown hit its 28 day on Friday, making it the longest government shutdown in U.S. history, and is the direct result of a debate between President Trump and Congress to fund the building over the funding of Trump’s proposed border wall.
Don’t miss: This furloughed worker found a unique way to make $ 2,000 a month during the shutdown
Still, the shutdown has taken an emotional and financial toll on her and her family. Health insurance deductibles have reset because of the New Year, which means any sickness or health emergency would hit them hard monetarily. They’re not going out or buying things, and spending frugally on food.
Her confidence has plummeted, and she thinks it will take months to recover emotionally, she said. “You don’t plan on your government creating the emergency,” she said. “You think of a problem with the roof, or someone gets hurt or sick. Not that the government decided not to pay my husband and make it so that I am unemployed.”
The shutdown could also have a ripple effect on workers’ finances, even after it ends. Missed payments for credit card or mortgages are eventually reported to credit bureaus, which could result in as much as a 90- to 110-point drop on a FICO score of 780 or higher, according to Credit.com.
Credit scores affect the eligibility or interest rates borrowers have when looking to finance a car or home. Although that risk is at the tops of minds for many furloughed workers, their first priority should be to pay whatever they can toward their bills now — eventually credit scores will rebound, said Beverly Harzog, a credit-card expert at U.S. News & World Report and author of “The Debt Escape Plan.”
‘You think of a problem with the roof, or someone gets hurt or sick. Not that the government decided not to pay my husband and make it so that I am unemployed.’
Blaylock still plans to pay off her student debt, though at a later date, and said her first priority will be to save enough to weather another shutdown. “We have to be extremely fiscally conservative and financially competent, which we felt we were but this has made us more acutely aware of this need,” she said.
See: 4 awful ways the government shutdown affects furloughed workers
Here are a few other ways furloughed workers can recover when the shutdown is finally over:
Don’t splurge (if you’re lucky to get paid post-shutdown)
The president signed a bill allowing federal employees to receive back-pay when the partial government shutdown ends. This does not include federal contractors, who will rely on their companies to pay them if they’re able.
But federal workers shouldn’t get too excited when they see a larger-than-average paycheck, said Mariel Beasley, co-founder and principal at Common Cents Lab, a behavioral science research center at Duke University.
Workers are always at greater risk of overspending after a pay day, according to previous research, which means federal employees getting a fat check for their current and back pay may be tempted to pay off immediate debts and treat themselves to something extra without putting money aside.
“It is hard for us to remember scarcity when we are in times of abundance,” Beasley said.
Pay off debts, by all means, but do so rationally
The shutdown has likely inspired some government workers to pay off debts as soon as they can when the shutdown is over, but they should only do so carefully, Beasley said. Borrowers tend to want to pay off small debts first, which is naturally motivating, but they should pay attention to the steepest interest rates.
There’s an ongoing debate about which method — small loans first or higher-interest loans first — is best for paying off debt. Beasley suggested tackling higher interest payments first, which would ultimately prevent borrowers from spending so much on interest. If there is a small loan that a borrower really wants to pay off, he or she should attend to that if it helps keep the repayment of other loans on track.
Paying off debts quickly may feel good, but workers should also build up an emergency savings account. Putting extra money toward debt repayment each month won’t offset future dues and, without a cushion, they could end up in the same or worse trouble if they were to be furloughed again, or face another emergency.
Traditional financial advice says Americans should have three to six months of expenses saved, but Beasley suggests they also have the equivalent of one to two months of loan payments set aside as well.
Also see: Hard-up federal workers seek jobless benefits, dip into retirement funds to pay bills as shutdown drags on
Reflect on how you survived this period of frugality
Federal workers have had to intentionally cut down on spending this month because they’re unsure of if or when they will go back to work or get paid. When the shutdown is over, some may be free to go back to their usual lifestyles, if they only lived for today, but they might also want to reflect on what they can do differently to save more, Beasley said.
If they lived without subscription services like Spotify or Netflix NFLX, +0.51% for a month, maybe it’s time to reevaluate whether it’s really a worthwhile expense. Some workers may want to change their direct deposit options, so that more of their money is automatically going into a savings account for emergencies. Or they might want to negotiate cable or cellphone bills, create a budget and cancel unused subscriptions. “It’s leveraging that motivation to be better prepared,” she said.
Furloughed workers are scrambling to delay their bills, and some lenders are offering assistance with zero-interest loans or reversed overdraft fees. Bills, of course, are not disappearing — unpaid federal workers owe more than $ 400 million in mortgage and rent payments, and are also on the hook for auto loans, credit-card debt, student loans and everyday expenses.
The Internal Revenue Service will still issue tax refunds, which usually provide relief for>cut taxpayers often use to pay off debt and medical bills, but likely at a slower rate because the agency is understaffed.
Get a daily roundup of the top reads in personal finance delivered to your inbox. Subscribe to MarketWatch’s free Personal Finance Daily newsletter. Sign up here.