Financial Buffer

The year 2018 started with a lot of excitement but ended with many disappointments; the market dropped almost 20% of its’ value and the government shutdown began. The dramatic end of 2018 left a lot of uncertainty for 2019.

Fast forward to the third week of January 2019, the political football game has turned ugly and the implications of the government shutdown are starting to trickle down in to the economic arena. While the partial shutdown alone will not cause a recession, prolonged shutdown may increase the risk of the economic downturn. Although the US economy is strong and the markets are recovering from the losses experienced in last quarter of 2018, the IPO markets are feeling the heat. There are reports of 160 new companies that have filed to go public so far this year; unfortunately, these companies are not getting approved – creating a backlog due to insufficient staffing at the SEC. This is just one way the shutdown might shake the investors’ confidence in the near future.

When it comes to personal finance, there is no denying the consequences of the shutdown. About 800,000 employees are working without pay. Although the employees will eventually get paid, their expenses are not waiting; mortgages or rent still need to be paid, kids need to be fed, daycares need to paid, bills and loans are becoming due. Some of the employees barely had a month worth of savings to cover the monthly expenses. Some people have used the little savings they had and now they are accruing debt – expensive debt in the form of credit cards and payday loans. If the shutdown continues, most of the employees will incur major financial setbacks.

This brings us to the point of this post – most of us are financially fragile, we are one-fall-away from breaking our financial backbones. It might seem hush for affluent people to be fighting in Washington while regular workers are suffering; but this in the nature of our democracy today. The reality is that the economy, politics, and the stock market do not care about your personal finances. If the politician cared, they would not let innocent employee suffer over a battle of ideology.

The economy is also running strong but people are still getting laid off; for instances, Sears is filling for bankruptcy, GM laid off about 17,000 employees, and Tesla just announced it will cutting 3000 employees and contractors. My point is: the stock market and the economy could be doing great, but financial hardship will still occur to some people. Never put your hope on a new government or wait to see what the economy does; make personal finance your responsibility.

The past 10 years have brought prosperity to those who invested in the stock market, but millions of people did not benefit from the longest bull market in the US history. So, if you’re not taking care of your personal situation, neither the government nor the stock market will help you in any significant way. If you do not have an emergency fund, a retirement account or any form of savings, you are at the mercy of your employer. Saving strengthens your financial backbone and provides leverage or bargaining power when negotiating with your employer.

That is why I advocate for emergency funds – life is full of ups and downs; having a financial buffer will smooth out the unexpected roughness we may encounter. No one expected the government to shut down for a long period; but here we are three weeks later. GM employees were not predicting the massive layoff that was about to happen; Tesla can barely keep up with the demand but that did not stop the company from slicing its workforce. Life is unpredictable; and that is why we need a financial buffer. If all the government employees had 3 months worth of savings, they would still be able meet their monthly financial obligations.

If it is difficult to save three months worth of expenses, start small. For instance, start funding Daycare account until you have enough for one month, then open another account and save enough to cover one month of rent/mortgage, do the same for car/student loans, groceries, and so forth. With a series of small wins, you will have momentum on your side; continue saving until you have 3 or 6 months emergency fund. While you’re making progress, you will notice financial stress will decrease. Few months into your financial journey, you will realize that you have broken the cycle of living paycheck to paycheck.

To conclude, if you don’t have an emergency fund, take a look at the government employees working without pay. Government jobs are considered stable; but unforeseen shutdowns or layoffs do happen. The economy and the government do not care about your finances unless you have the influence of the top 1%. So, do yourself a favor, create a buffer zone to insulate yourself from the hostility of life’ unknowns. Have an emergency fund, start small – the important thing is to save. “Do the best you can until you know better. Then when you know better, do better.” Maya Angelou

Create a habit of saving and delaying instant gratification. Have a plan for the rainy day! And finally, when that rainy day arrives, you will be glad that you planned for it!

Thank you for reading.