Author: Brian Kurrus, CFP®
Unexpected medical expenses, major home repairs, family obligations, or shifts in household income can all place pressure on a budget. For Federal employees, the risk of a change in employment status or government shutdown can add another layer of complexity.
While the causes may differ, the financial principles that help protect your household remain the same. Here are practical steps to help you stay financially grounded when expenses rise, income becomes less predictable, or life throws an unexpected challenge your way.
Prioritize Essentials First
Start by separating essential expenses from discretionary spending. Focus first on core obligations such as housing costs, utilities, groceries, insurance premiums, and required debt payments.
Revisit Your Emergency Fund
If you already have an emergency fund, this is exactly what it’s for. The goal isn’t to preserve it at all costs; it is to provide stability during uncertain times. Consider at least 3 months of living expenses, ideally 6 months or more, in liquid, safe investments such as checking, savings, or money market accounts.
If your emergency fund is lacking, review your cash flow and budget now to consider what changes you can make to spend less and save more. One could temporarily reduce retirement contributions to 5% to build up emergency reserves while not missing out on any TSP matching.
Accessing Other Investments
If you have other non-retirement investment accounts beyond your emergency fund, this could be a good place to turn to next. Evaluate any unrealized capital gains associated with liquidating positions and using these funds. The higher the unrealized gains, the less attractive this becomes.
While employed, a TSP loan for up to $50,000 can be an attractive option. You temporarily forgo the investment potential of the borrowed funds, with no tax implications if the loan is ultimately repaid. You can generally continue repaying the loan over time even if separating from service.
Retirement plan withdrawals may also be on the table for those over 59½. For those who are not, a hardship distribution is possible, but this is generally one of the last options to consider due to tax implications and penalties.
Debt Management Strategies
In many instances, a HELOC could provide access to funds at a lower rate than credit cards and without the taxes and penalties of hardship distributions from retirement accounts. When evaluating any debt, the interest rate is one of if not the most important factors.
We want to avoid the high double-digit interest rates of revolving credit card debt if at all possible. Prioritize paying down debt with the highest interest rate first in almost all circumstances.
Conclusion
If there is one thing we know for sure, unexpected expenses will come at some point in time. Plan ahead by evaluating your budget and cash flow now and getting a proper emergency fund in place. If you feel any risks are heightened at this time, all the more reason to build an emergency fund that goes beyond the basic 3-6 months of living expenses.
If you are dealing with tough times now, focusing on the essentials, preserving flexibility, and making thoughtful short-term adjustments can help you stay on track without losing sight of your long-term goals.
Brian Kurrus, CFP® specializes in working with families and small business owners; his mission is to provide his clients with a diverse range of wealth management ideas and solutions. His specific areas of focus are estate conservation, business succession strategies, retirement funding, long-term care issues, life insurance, and disability income insurance. Brian has been an instructor for NITP since 2017.
This newsletter is designed to provide information on the subjects covered. NITP, Inc. takes great care to insure the accuracy and quality of these materials which are provided without any expressed or implied warranty, including, but not limited to, their fitness for a particular purpose. They are also provided with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, financial planning or other professional service. If additional assistance is required, the services of a competent professional should be sought.
