Facing a Furlough? Develop a Plan
Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, firstname.lastname@example.org
Furloughs (also known as “temporary layoffs”) have been in the news a lot lately. Once used primarily by employers of blue-collar workers during times when work loads slowed down (e.g., construction jobs and auto industry assembly lines), they have increasingly been extended to white-collar workers in both the public and private sector including state and local governments, colleges and universities, and large corporations. Furloughs have increasingly been used to close gaps in employers’ budgets when their income is reduced due to declining income and sales tax revenue or company profits. They are seen as a more “humane” alternative to permanent layoffs and also enable employers to retain skilled and experienced employees who will be needed when the economy eventually rebounds. When large employers cut even a few days of their workers’ pay, they can often save millions of dollars during tough economic times.
In some cases, furloughs are voluntary and employers may ask for volunteers to take unpaid leave in exchange for more time off. In most cases, however, furloughs are mandatory and every worker is told to work less, and therefore earn less, sometimes as many as 12 to 15 days per year. For a worker earning, say, $180 a day (about $47,000 annually), a 12-day furlough (e.g., one work day per month) translates into a loss of $2,160 in gross income or about 4.6% of annual earnings. For workers living “paycheck to paycheck,” furloughs can make an already financially stressful lifestyle even more so.
On the other hand, furloughed workers are not unemployed. They get to keep their job and benefits such as health insurance, unlike millions of Americans who have lost their jobs. In most cases, furloughed workers will still earn 90% or more of their annual salary or wages. In some cases, furloughed workers who are out of work for a week or more at a time may be eligible to apply for state unemployment benefits that can partially offset their lost income. If you’re facing a furlough, you need a plan for both the income loss and your use of the unpaid time. Below are seven strategies to consider:
Start Calculating- Start by figuring out what you earn in a day. For example, if you earn a $40,000 gross income (i.e., your salary before taxes), divide this number by 260 (the average number of workdays in a year). The result ($154) is your gross daily pay. Then multiply this number by your federal marginal tax rate (see the Web site http://njaes.rutgers.edu/money/taxinfo/ to find this rate for your tax filing status) and subtract it from gross daily pay to determine your daily after-tax pay. For example, $154 – ($154 x .25 or $39) = $115. This is a rough estimate of income lost for each furlough day. It will actually be somewhat less when FICA and state income, unemployment, and/or disability taxes on lost income are subtracted.
Seek Information- Find out when and how your pay will be reduced and the procedures that your employer has established for taking time off. This will affect your financial and time use plans. Some employers are giving workers a choice of days off while others are mandating specific time periods, such as spring break for university employees. Many employers are developing furlough policies for the first time and workers will need to learn the rules as they are developed.
Save a Surplus- If you have enough advance notice about a furlough, try to gradually save up the amount of money that you will lose (e.g., six days of daily after-tax pay) by reducing expenses. Put this money in a money market fund or short-term CD until it is needed. Then draw down this savings as a replacement for lost income. If there isn’t enough time to do this, consider earmarking a portion of each “full” future paycheck to supplement each “lean” one.
Spend Less- Try to reduce monthly expenses by the amount of lost monthly income. Start with variable expenses (e.g., food, clothing, entertainment, gifts) and make cuts there. Often, small daily expenses (e.g., daily coffee and a muffin or deli lunches) can add up to $100 or more of spending on a monthly basis. Track your spending for an entire month to identify expenses that can be reduced during the furlough period.
Suspend Voluntary Deductions- If you can’t close the gap between your reduced income and household expenses entirely through spending reductions alone, consider temporarily suspending (or reducing) voluntary payroll deductions, such a charitable donations and retirement savings plan contributions, until the furlough ends. Contact your employer’s payroll or human resources department to complete the necessary paperwork.
Seek Self-Employment- If you already “moonlight” in addition to the “day job” from which you are being furloughed, try to ramp up your workload to recoup the income being lost with earnings from self-employment. The furlough days will give you extra time to take on additional work assignments. If you don’t currently do work on the side, consider doing so on the unpaid days off. For example, IT workers might be able to freelance their Web site development skills, secretaries could take on clerical assignments, and college faculty could consult on research or education projects.
Savor the Time- Granted, a furlough is not something most workers would choose. Nevertheless, it does provide something valuable that many Americans have in short supply…time. Resist the urge to work (e.g., check business e-mails) on furlough days and spend the unpaid time doing enjoyable or necessary activities. Ideas include visiting family and friends, inexpensive day trips, taking an adult education class, watching a movie, and home maintenance and repairs.