Money Talks, So Should You

Q&A: How can I prepare for a furlough?

Lazetta Rainey Braxton
by Lazetta Rainey Braxton , NAPFA

Department of Defense employees are bracing themselves for the upcoming furlough — a mandatory, unpaid day once a week for up to 22 weeks. The furlough reflects one of the many federal budget cuts enacted by the sequestration.

Here are five financial tips for preparing for a temporary pay reduction.

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• Estimate your net pay. Calculate the percentage of pay you will earn based on your furlough work schedule. For example, you will earn 80 percent of your salary for a four-day work week (four out of five days = 4/5 = 80 percent). Review your paystub and determine which deductions will remain the same (e.g., medical premium, parking fee, flexible spending account contribution) or change based on your pre-tax or after-tax income (e.g., income taxes, Medicare taxes, retirement contributions).

Subtracting the flat rate deductions from your gross pay is straightforward; calculating the variable deductions requires more effort.  You can use 80 percent of the total variable amount as a ballpark figure or use tax tables and deduction percentages for more accurate figures.

• Compare the income shortfall to your expenses and savings.  Determine if you can live off of this reduced income by altering your current spending. Closely examine where you can shave expenses by thinking frugally. Going cold turkey on some expenses will be difficult but necessary. Short-term sacrifices support long-term financial stability. Review your emergency savings to determine how much cushion you have to cover necessary expenses. Try to maintain your retirement contribution if you can. 

• Embrace do-it-yourself activities. Remember when you mowed your own lawn, transformed your bathroom into a hair salon, and prepared meals worthy of airing on Emeril’s or the Neelys’ cooking shows? Now is the time to touch up those skills and find your stored tools and equipment. Savings on home maintenance, salon services, and dining and entertainment go a long way in stretching your budget.

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• Protect your credit status.  If you have streamlined your discretionary expenses, accounted for your savings, and still find yourself short on funds, figure out ways to work with your creditors on current debt obligations.  Determine if you can reduce your contractual services without penalty (e.g., cell phone contracts). If you have medical bills, negotiate payment terms during the furlough period to avoid having your account sent to collections. If your credit status is good, try to qualify for a home equity line of credit or a personal loan to consolidate your credit balances at a lower interest rate.

• Put your skills to work during your time off.  Consider how your skills could generate additional income. Creative? Is there a market on Etsy for selling your masterpieces or on eBay for selling your existing, gently used items? Are there free classes online or at a community center that will sharpen your skills?  This extra time may offer an opportunity for you to develop your own business plan or transition into a new career.

Having a plan for a reduction in income will ease your furlough experience. Discover the gift of having extra time to reflect and focus on the priorities of you and your family. 

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Lazetta Rainey Braxton, CFP, is founder of Financial Fountains, a fee-only financial planning and investment management firm. Braxton is a member of the National Association of Personal Finance Advisors (NAPFA), a fee-only professional association and a Dimespring knowledge partner.