Making headlines this week, the federal government shut down, resulting in hundreds of thousands of federal employees being furloughed.
When someone is furloughed, he doesn’t receive a paycheck. Even if that person eventually receives backpay, furloughs can be a huge problem for those individuals.
Why?
Because most people, even high-earners, live paycheck to paycheck.
When you’re furloughed, money stops coming in. But, money keeps flowing out.
The mortgage still needs to be paid.
The kids still need to eat.
The credit card balances are still due.
As reported by CBS News:
But even federal workers who eventually receive back pay can suffer during a shutdown, as many of them live paycheck to paycheck, [Dan Koh, former chief of staff of the Labor Department] added.
“Even if you are entitled to back pay, a lot of people can’t go even a couple of days without their regularly scheduled paycheck,” he told CBS News. “If you have to pay your subway fare, for gas, if something breaks in your home, and you’re not getting paid, it places extreme stress on government employees,” he said.
So, what can we do to help protect ourselves from furloughs or any other sudden loss of income?
We can protect ourselves in two ways.
First, we can protect ourselves with an emergency savings account.
Second, we can protect ourselves with parachute money.
For the ultimate protection, we can have a fully-funded emergency savings account and parachute money.
Let’s take a look at exactly what that means.
Protect yourself from a sudden loss of income with an emergency savings account.
The first savings account you need is commonly referred to as an emergency savings account. This is your ultimate security blanket for whatever life throws at you.
For example, if you are furloughed and lose your source of income, your emergency savings will keep you afloat until you’re working again.
The idea is to use your savings so you don’t have to pull from your long-term investments.
Your emergency savings is not just for when you get furloughed or lose your job. Your emergency savings will also protect you in times of emergency (brilliant, huh?), like unexpected medical bills or expensive home repairs.
The idea remains the same: instead of pulling from your investments, you will have cash available in your savings account to cover your needs.
Aim for 3-6 months of Now Money saved for emergencies.
Aim for building up 3-6 months of your Now Money saved in a dedicated emergency savings account.
In your Budget After Thinking, Now Money represents the consistent, reoccurring expenses that you need to pay every month to take care of yourself and your family.
Since you will only be using this money in times of emergency, you can, and should, forego some of life’s luxuries until you get back on track.
The same is true for fueling your Later Money goals. Take a pause until you sort out whatever it was that caused you to spend your emergency savings in the first place.
While your emergency savings account is your first line of defense when you are furloughed, I prefer having an extra layer of protection.
I refer to this additional protection as Parachute Money.
What is Parachute Money?
Parachute Money is one of my favorite concepts in all of personal finance.
The analogy goes like this:
Pretend your life is like flying on an airplane.
For whatever reason, you decide you need to get off this airplane. Maybe conditions outside of your control have forced you to jump. Or, maybe you’ve decided that it’s time to take control and make a change.
Either way, you’re ready to jump.
All you need is a parachute.
You have a choice between the only two parachutes on the plane.
The first parachute has only one string (or line) connecting the canopy to the harness . You think to yourself, “This doesn’t seem very safe. What if that one string breaks? That would end very badly for me.”
Then, you look at the second parachute.
The second parachute has 10 strings. You say to yourself, “OK, this one looks much safer. If one string breaks, the parachute still has nine other strings to keep me safe. Even if something goes wrong with one or two strings, I would glide safely to the ground.”
It’s obvious which one of these parachutes to choose, right?
OK, cool.
But, what does a parachute have to do with money?
Each of your income sources is like a string on your parachute.
The central idea of Parachute Money is to create multiple sources of income so you are not beholden to any one source.
Picture each source of income as a string on your parachute. The more strings on the parachute, the stronger it is.
With Parachute Money, if one of your sources of income dries up, like when you are furloughed, you are more than covered with your other income sources.
Of course, the more sources of income you have, the stronger your personal finances are.
Parachute Money includes your primary job, any side hustles, any income generating assets, and your emergency savings account. It also includes the income of your significant other, if you share finances.
The key to Parachute Money: protect yourself with as many investment and income sources as you can.
That’s why in addition to my primary job as a mesothelioma attorney, I invest in the stock market, own rental properties and am an adjunct law school professor.
It is not easy to maintain an emergency savings account of 3-6 months.
Having 3-6 months of emergency savings is a wonderful achievement. It takes time and discipline to build up that level of savings.
Personally, I’ve struggled to accumulate a sufficient emergency savings account.
It’s not that I have a low saving rate.
It’s that I’ve chosen to prioritize investing in real estate for the past seven years. Whenever I had enough money saved up for a down payment, I bought another property.
Admittedly, this was a risky strategy.
That’s why I do not recommend this approach for most people.
Instead, for just about everyone reading this, I would recommend you build up your emergency savings account before moving to other financial goals.
Did you notice that I said “just about everyone reading this”?
That’s because I think people who are protected by parachute money have earned the right to take more risks at the expense of their emergency savings.
Let me explain.
If you have parachute money, you can get away with a smaller emergency savings balance in the short run.
I was comfortable underfunding my emergency savings account in the short run because I had a strong parachute with multiple income streams.
As I mentioned, my wife and I were both working as attorneys and had various income streams. If one of our income streams dried up, such as during a furlough, we would have been protected by our other income streams.
Because of these multiple income streams, we were comfortable taking on the risk of having a low emergency savings balance.
If you are in a similar position and have multiple streams of income, you may also feel comfortable with a smaller emergency savings balance.
From where I sit, you’ve earned the right to invest your money rather than letting it sit in a savings account. If that’s your choice, I wouldn’t blame you. I made the same choice.
That said, I would not recommend you shortchange your emergency savings in the long run. While it’s OK to temporarily prioritize other investments, I still believe that an adequate emergency savings account is essential to a healthy financial life.
That’s why I am now focused on building up my emergency savings instead of acquiring more real estate. I’ve reached a good place with my investments. Now it’s time to focus on protecting my family.
I think of it like this: my parachute is otherwise very strong between my primary job, my adjunct teaching job, my rental properties, and my other investments.
The one string that I need to add is a sufficient emergency savings balance. That’s why building up my emergency savings will be my top money goal for 2026.
When you combine emergency savings and parachute money, you are as protected as possible.
The ultimate level of financial protection comes from having an emergency savings account and parachute money.
You are protected in a variety of ways if one of your income streams dries up.
If you haven’t prioritized an emergency savings account or developing parachute money, let the recent government shutdown serve as a reminder of how important these concepts are.
Whether you are in the tech industry or an attorney or a consultant, there’s no guarantee that your job will last forever.
The overall economic outlook is hazy at best right now. Ask five “experts” what the economy will look like in two years and you’re likely to get five different answers.
It’s up to each of us to build in multiple layers of protection in our financial lives to avoid disaster if our primary source of income dries up.
Do you have an emergency savings account?
How strong is your parachute?
Let us know in the comments below.
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