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What to Expect From the Federal Fiscal Fallout

This content is provided courtesy of USAA.

With no alternative plan emerging in Washington, D.C., $85 billion in automatic 2013 federal spending cuts are set to kick in on March 1, and the government's response will affect the income of hundreds of thousands of federal workers, contractors and their employees.

"While uniformed service members' pay will not be impacted for now, the Department of Defense has announced it will place many of its civilian employees on unpaid furloughs in the form of 22 unpaid days off, spread from late April through the end of the fiscal year on Sept. 30," says Dan Brouillette, senior vice president of government and industry relations at USAA.

 

Because each federal agency is tasked with implementing its own assigned spending reductions, every department may take a different approach to meet the targets. That's part of the pain built into sequestration — across-the-board spending cuts initially designed to pressure Washington's leaders into a more comprehensive budget solution.

More Unresolved Issues Await

Two more spending-related deadlines still loom over the coming weeks. First, on March 27, a continuing resolution that provides spending authority for government operations will expire.

"While the sequestration cuts aren't expected to have any effect on active-duty military pay, an impasse that prevents authorization of new government spending could prompt a federal government shutdown," Brouillette says.

The second involves the debt ceiling, which is the total amount of money the federal government is authorized to borrow.

"On Feb. 4, the president signed a bill to further delay the impact of the debt ceiling until at least May," Brouillette says. "This will give the government some breathing room with regard to borrowing."

Preparing for Furloughs ... or Worse

The impact for those who depend on federal payments may not start until April 1 or even a few weeks later. That gives those who are affected a few weeks to brace for the impact on their bottom line.

"Those who are sidestepping this first round of cuts would still be wise to plan ahead — in case they're not so fortunate when the next deadline comes around," says Scott Halliwell, a CERTIFIED FINANCIAL PLANNERTM at USAA.

Halliwell offers a five-step fiscal tightening process for those whose paycheck comes from the federal government.

1. Develop a budget. "First, you need to have a good handle on where your money currently goes," Halliwell says.

2. Reduce expenses. To free up cash, Halliwell suggests studying your budget and finding places to cut back on nonessentials now. "Expenses like premium cable channels and frequent dining out are 'wants,' not 'needs,' and are a great place to start."

3. Build up your savings. "The next step is about taking the extra money, and saving it," Halliwell says. Allocate all the money you save to your emergency fund. "If there is ever a chance your paycheck could get disrupted, your first line of defense is to have cash in the bank." Additionally, look for other income sources; for some, part-time work for you or your spouse may be an option.

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4. Avoid large purchases for now. Occasional large expenses are just part of life, but now might not be the best time to incur them. "If you've got a large expense or big purchase on the horizon — whether you're planning to pay cash or borrow the money — hold off for now," Halliwell urges.

5. Ensure access to credit. "Don't allow this situation to bury you in debt," Halliwell cautions. "But make sure you have credit available just in case you run out of cash and other options." As an additional layer of financial security, establish overdraft protection on your checking account if you don't already have it and research any related fees associated with any borrowing you have to do. You should avoid taking on extra debt if possible.

"This is a good time to develop a plan to keep your finances on track if things get tight," Halliwell says. Plus, if the issues in Washington ultimately get resolved and your planning wasn't needed, you'll likely be better off for the effort.

 

 

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