Famed investor Warren Buffet once remarked, "Only when the tide goes out do you discover who's been swimming naked" — meaning that market reversals have a way of revealing those who aren't prepared for adverse circumstances.
The same idea holds true for personal finances, not just investing. An interruption in pay, for example, quickly reveals those living on the financial edge.
The partial government shutdown began 11 days ago. Today's Wall Street Journal describes a federal worker who "isn't sure how long he can last without a paycheck":
[Ernest Johnson, a geologist for the Bureau of Land Management in Wyoming,] has already deferred his January car payment, applied for unemployment benefits and alerted his landlord that he may have to break his lease in February. Friends have offered to help with rent if he needs it....
As the partial government shutdown stretches into its second week with no end in sight, about 380,000 federal employees are facing the same uncertainty as Mr. Johnson, after being put on unpaid leave, or furloughed....
The U.S. Office of Personnel Management released a series of form letters last week advising federal employees how to ask for extensions on mortgage or loan payments. The letters also suggested federal employees offer to "perform maintenance (e.g. painting, carpentry work) in exchange for partial rent payments."
People, get ready
Being furloughed is an unhappy circumstance and workers experiencing an interruption in pay should have our sympathy. But the shutdown serves as yet another reminder about the importance of being prepared for financial emergencies.
Unfortunately, most people aren't prepared. Last May, we noted a Charles Schwab survey in which 60% of respondents conceded they "live pay to paycheck." Only 1 in 3 (35%) had an emergency fund. (A 2015 Nielsen study found that even many high-earning households — i.e., with an income of $150,000 or more — live paycheck-to-paycheck.)
The way to stop living paycheck-to-paycheck is simple, though it may not easy. You have to spend less than you earn over an extended period of time. By not spending every dollar that comes in, you can build savings and be ready for financial emergencies and setbacks.
Of course, having little or no debt makes it much easier to ride out a financial storm, too. You don't have to negotiate with creditors if you don't have any!
All of us will face seasons in life when the financial tide goes out. How long could you cover essential living expenses if your income was interrupted?