How to prepare for next unplanned financial crisis

The shutdown of the federal government affected many people’s lives. Anyone even partially dependent on government work has cause to be worried, despite promises from lawmakers that they won’t put us through this again. Don’t bet on it.

Fearing another shutdown, many people joining one of my online discussions wanted to know how to prepare for it the next time.

Question: I recently refinanced my home to a tune of dropping my mortgage payment by $450 a month and getting $20,000 cash out. I still have $125,000 equity in the home. My job situation is slightly more stable now that the government is back, but as a Department of Defense contractor, I know I’m facing leaner times ahead. My fiance and I have gone over the options for what to do with this cash, and we would love some advice. We have two homes, mine rented out to cover the mortgage, very little in savings, about $15,000 in student loans, $30,000 between two car loans and $120,000 in combined income. We were thinking about paying off the student loans and stashing away the remainder for an emergency fund to get us started. We’ve already started on a budget that enables us to save around $3,000 a month. The fundamental debate is should we have liquidity in uncertain times versus getting rid of the debt?

Answer: I applaud your efforts to save and get rid of debt. That’s smart in good times and bad. But keep in mind the $20,000 you have isn’t free money. It’s mortgage debt.

Think of it this way. Using the $20,000 to pay down debt is taking borrowed money to pay down or pay off borrowed money. You’ve only restructured this debt. You have not gotten rid of it.

What if you saved the money?

You wouldn’t want to risk your emergency money by investing. Therefore, you might park the cash in a savings account. But you’d be losing money because the interest rates on deposit accounts are pitifully low compared to the interest rate you are paying on the mortgage.

I would have not pulled out the money. You would have been better off taking the extra monthly savings from the refinance and applying that to your debt along with other cash you found in your budget.

However, you’ve borrowed the money. Now what? You might as well use it to get rid of your student loans, especially if the interest rates are higher than your mortgage rate. With the remaining cash, pay down your car loan. Or you could use the money to reduce what you owe on your home if you plan on keeping it as a rental for a long time. (Until you’re married, I wouldn’t pay down your fiance’s debt with money you borrowed).

Question: I work for a nonprofit that was affected by the federal sequester and will most certainly be affected by any future budget fights. I don’t live paycheck to paycheck. I have an emergency fund and could easily survive a two-week shutdown, but realistically I’m planning for the permanent loss of my job. I’ve tried to do everything right: savings, no debt except mortgage, updating skills. We have a rent-paying housemate. I don’t buy designer shoes. Still, I could lose everything if the federal funds my agency depends on disappear. How do you plan for unemployment that may or may not happen? Do I make necessary home repairs or bank the cash? Do I take classes that might help me find a new job, or do I hold on to the money for when Congress defunds us, then refunds us, then threatens our funding again?

Singletary: If your job is not secure, you should not take on any major expenses until you’ve got some reasonable assurances — as best any of us have now — that your job is safe.

So yes, bank as much cash as you can. This is the time to aggressively build up more in your emergency fund to at least six months’ worth of living expenses.

And yes, if the jobs you are thinking about applying for — should you lose your current employment — require additional skills you don’t have, then take some classes. But don’t borrow to go to school.

This wasn’t a question but a testimony I wanted to share: “I am a federal attorney, and my husband works full time as well in another field. Thanks to you, we had a ‘life happens’ fund and were working hard to build up a decent emergency savings. When I get my back pay, it’s going right back into those funds. And we’ll reinitiate our automatic savings transfers so we will get to that six-month mark for emergency savings.”

Michelle Singletary: michelle.singletary@washpost.com.

Washington Post Writers Group

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