Regulatory Outlook | 01.24.19
Shutdown Shows the Importance of Financial Preparedness
With the longest federal government shutdown in American history dragging into a fourth week — and a second pay period — some 800,000 federal government employees find themselves in a tough spot. Their checks are not in the mail.
Many are having to scrape and scramble to cover necessities, according to scores of national and local news accounts.
If the whole sorry affair has any silver linings, one is that it’s been something of a wake-up call in the realm of personal finance. For advisors, whether blue in the face from preaching about the need for rainy day funds or overly fixated on longer-term planning, the shutdown should serve as an instructive reference point.
An Emergency Savings Emergency
Shorter-term contingency — disaster planning — is a conversation waiting to happen.
Banking and credit industry studies routinely suggest that large swaths of households are scarcely able to miss even one paycheck, let alone two or more.
Last year, Bankrate's financial security index survey showed only 39 percent of American households would be able to cover a $1,000 setback using their savings.
Not surprisingly, media coverage has gravitated toward tales of hardship, but, anecdotally, the notion of two-thirds of middle-income earners living check to check seems to be bearing out; slimmer in volume are news stories of sensible federal workers who took steps to build a cushion. Some Washington, D.C.-area advisors told Investment News that they have clients who did, in fact, plan ahead, but others… did not.
“Advisors and brokers don’t do enough short- and medium-term planning,” insisted Knut Rostad, president of the Institute for the Fiduciary Standard.
Over the course of the Department of Labor (DOL) fiduciary rule debate (and its demise) these past few years, Rostad has emerged as one of the most outspoken critics of commission-seeking brokers pushing products.
"Real fiduciary advisors are preparing clients for emergencies,” Rostad said. “Budgeting and savings for three to six months of expenses are most common among fee-only advisors. It’s about as basic as brushing your teeth.”
Among Certified Financial Planners, only about 15 percent self-identify as fee-only, Rostad said.
Short-Term Holes, Long-Term Implications
Financial advisors often urge clients to be better prepared to handle unexpected expenses, such as medical bills or home repairs, for the purpose of peace of mind. But there’s another reason: These debts pile up and ultimately cut into retirement and college savings funds, eroding clients’ overall financial well-being.
"The rainy-day fund we have encouraged our clients to establish has finally found its rainy day," Erik Scudder, a financial planner in Fairfax, Va., told Investment News.
Here’s a rule of thumb courtesy of CFA Ben Carlson: While most personal finance experts recommend keeping 3–6 months in an emergency savings fund, there’s a more realistic plan: Shoot to save $500.
“Set up a plan and make it a priority,” Carlson said. “Then increase it from there until you reach a level you are comfortable with that can aid you in a pinch.”
The National Foundation for Credit Counseling and its nonprofit member agencies are seizing the moment via targeted outreach to those who have been living without a paycheck during this government closure.
“Not everyone is fully prepared to last a month or more without pay,” said NFCC spokesman Bruce McClary. “This is why it is urgent that furloughed federal workers reach out to a financial professional for guidance.”
All furloughed government workers who are living on personal savings should communicate with lenders and make arrangements with utility providers, the NFCC said.
Reuben Brauer, a senior financial planner at Callahan Financial Planning in Omaha, offered some advice to furloughed workers. First, use up cash reserves. If you don’t have any, Brauer recommended looking at investments that aren't in retirement accounts.
“Stocks, bonds, ETFs, mutual funds that are not in an IRA or a retirement account," Brauer said. And look at home equity or personal line of credit.
JPMorgan Chase is waiving fees and offering a call line, and advisors at XY Planning Network are providing free financial advice to unpaid employees, according to Financial Planning.
In a recent Forbes.com post, CFP Liz Frazier Peck suggested a few ways to start down the road to better financial preparedness: Put away whatever you can each month, cut down on unnecessary expenses, get a side job, sell stuff.
“Most Americans are not affected by this shutdown,” Peck said. “However, many Americans could find themselves in a similar scenario.”
Bottom line: Expect the unexpected. The great financial recession of 2008–2009, sparked by cracks in the subprime mortgage market that started in the summer of 2007, caught numerous families off guard when things went truly south. Credit lines were cut, lending seized up, companies went under and consumer spending disappeared, all within a period of a few months in late 2008.
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.