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What would you do if you missed two paychecks?

Workers missed two paychecks during the government shutdown. That would be an emergency for many Americans.


The government shutdown ended late last week. It went on for 35 days and meant that nearly 800,000 government employees and contractors missed two paychecks. Furloughed workers took out high-interest loans and second mortgages on their homes, and visited food pantries to get meals on the table. Though workers are still digging out, the worst of the nightmare is over for now due to a temporary spending bill; still, the government could shut down again in a few weeks.

For the rest of the country looking on, the question of what we would do if we missed two paychecks in a row was on many people’s minds. And for many, it was no mystery: They wouldn’t be able to afford it.

I’m a financial educator and adviser. Experts in my field have a wide variety of views and often disagree on specifics. Yet there is near-universal agreement on this: Always have an emergency fund — money set aside for unexpected costs such as medical bills, a broken-down car, or when the government is locked in a legislative battle that leaves you furloughed for a month.

In my 15 years of doing this job, people rarely are kept up at night because they worry about the specifics of tax-efficient investment or an inability to calculate interest rates. It is much more likely that they worry about having enough resources to weather a storm. It’s why prioritizing an emergency fund is likely to make your nights more restful and your financial life more resilient in the years to come.

An emergency fund is not meant to cover costs like a splurge, a vacation, or home maintenance. It is money set aside to manage unexpected drops in income or increases in expenses. Many experts advise three to six months of earnings.

Early in my career, when I suggested to working families that they put away this amount in an untouched emergency fund, most would look at me with shock. I quickly learned that the idea of moving from living paycheck to paycheck to having six months of earnings saved in the bank was so implausible, it was comical.

Many people I taught didn’t have adequate savings, and they weren’t alone — most Americans have very little set aside. According to the Federal Reserve, 41 percent of Americans could not cover an unplanned $400 expense without incurring credit card debt they wouldn’t be able to pay off that month. Only about half of Americans have an emergency fund at all, and according to data from the US Financial Health Pulse, more than a third of American are unable to pay their bills on time. And let’s not even start on retirement.

The reason is systemic. Americans are forced to rely on themselves in emergencies way more than people in most other wealthy countries that have much stronger safety nets. Relative to other developed countries — for example, Scandinavian ones — we have thinner unemployment insurance programs. We have a privatized health care system that often requires individuals to make costly personal payments. We are more likely to own cars and homes, which means that individuals are more likely to face large unexpected home or car expenses. All these factors make emergency savings much more important here than in other advanced economies — and much more difficult to have.

Why an emergency fund is important

During the shutdown, workers were forced to cope with their loss of income in many ways. Many turned to the gig economy or looked for temporary jobs like substitute teaching or freelancing. But unpredictable, low-paying side gigs usually can’t produce anything close to the amount workers need to pay their bills.

Others turned to credit cards to cover their expenses. This money is easy to access and might seem convenient, but long-term, it’s an expensive solution. The average interest rate for those with lower credit scores is 25 percent, so debt can very quickly grow out of control.

Another common option is taking payday loans. In this setup, a person agrees to let the lender access their checking account or gives the lender a check that the lender can cash as soon as their next paycheck hits the account. Payday loans are typically due just a week or two later. The average loan size is $350. But payday loan interest rates are usually more than 10 times as severe as credit cards, making it easy to spiral into deepening debt.

Saving for an emergency fund is hard. Here’s how to start:

1) Take baby steps: One piece of advice I always give to someone who is just starting an emergency fund is to ignore the advice of three to six months savings for now. Instead, just try to save $500. If the goal feels achievable, you’ll be much more motivated to get started. The momentum and feeling of success from achieving your goal will help you take the next step. For most people, I find, the second $500 is a lot easier to save than the first. Don’t worry about having a large amount saved on day one; just focus on getting started.

Once you have saved $500, keep going! Financial adviser and writer Bert Whitehead advises that people with dependable jobs keep 10 percent of their salary in a normal emergency fund, with the caveat that self-employed people or people with income volatility such as commissioned sales people or contractors need more.

2) Think of it as giving future you a loan: Imagine sitting at a table with a future version of you. Consider what emergency makes future you need help. Get really specific: Have you wrecked your car and still need to get to work? Is it a medical issue? Do you need to travel for a family emergency? Say yes to future you; drop it in your emergency fund.

3) Automate saving so you don’t forget: It’s very hard to remember to do something every week or every month. It’s harder yet to take action consistently. So don’t try to remember each week or each month — set up an automated solution to do it for you. Some people call this “paying yourself first.” Set up your bank account or paycheck so that it automatically moves money into a sub-account.

4) If you are a spender, make it annoying to access your emergency fund: For those who are disciplined savers and careful spenders, it’s just fine to keep the money in a checking account (it’ll help you keep a higher balance, which often helps reduce or eliminate account fees). For people who have a history of impulsive spending, credit card debt, or trouble setting limits, having the money visible and readily accessible may be too tempting. Consider putting the money into an account at a different institution. That way, if you log in to your checking account, you won’t see the emergency fund money.

5) Have an accountability partner: If you don’t have an emergency fund or you have one and it isn’t adequate, you are not alone. Way more than half of Americans (and many people you know) are in the same boat. Choose a friend or family member and set goals together. Every so often, check back in about how you’re doing with your savings. Knowing you’ll need to report back might offer the extra accountability you need to finally make progress.

6) If you take out money, put it back: I had a friend who was hired as a high-paid corporate lawyer and asked what tips I had for him. Among the things we discussed was the importance of emergency savings. A few years later, during the 2008 crisis, he was laid off. When we talked about it, I told him, “This is why you set up a rainy-day fund — it’s raining.” He got an embarrassed look and said there was nothing significant left, since a year earlier he’d had car troubles. He clarified that I hadn’t said anything about putting money back in if you take it out.

If you take money out, put it back! Bad news often comes in bunches. It’s important to rebuild your stability by replenishing your emergency fund quickly. For instance, federal workers might be wise to reserve a share of their back pay to refill their emergency fund. They may well need it again in three weeks when the continuing resolution expires.

7) If you could use professional help, make sure you get it: Many industry lobbyists work hard to keep the US system hard to navigate. There’s a dizzying range of financial decisions. If you want professional advice, you might find it at no cost through an employee assistance program at work. If you’d like to hire a financial adviser, consider avoiding conflicts by choosing a fiduciary adviser. I recommend making sure they don’t accept commissions. A good way to find a fiduciary adviser is to choose someone from a group like Alliance for Comprehensive Planners, XY Planning Network, NAPFA, or the Garret Network.

8) Support candidates who want to improve our safety net: Rather than individuals struggling to set aside money to cover health care costs or job loss, it’d be better if the US had an adequate safety net. Americans live in a country where it is usually financially prudent to leave money tied up in low-return emergency funds. That’s a policy failure. Of course, we should do the prudent thing for our households — but we should work toward a future where each family doesn’t have to allocate funds in this wasteful and inefficient way.

Many people read about the government shutdown and got the uneasy feeling that if something like that happened to them, they’d be in trouble. If that was your experience and you don’t have an emergency fund already, take this chance to start one — even if you are only starting with $50, make it happen and you can build from there.

Almost everyone will have an unexpected drop in income or a significant unforeseen expense. Emergency funds can be the difference between a sinkhole of debt that’s hard to escape and financial stability. You can start right now.

Zach Teutsch is a partner at Values Added Financial (VAF), a fee-only, fiduciary firm that helps clients structure their finances to support living prosperous, fulfilling lives. He is a member of the Alliance for Comprehensive Planners. Before launching VAF, he worked at the Consumer Financial Protection Bureau in the Office of Financial Empowerment. He previously built the first national financial skills education programs for unions. Find him on Twitter @zteutsch.

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