Have you been furloughed recently?
If you have been furloughed, this is one of the greatest opportunities of your life. I understand this sentence is controversial and may not represent how you feel in this very moment, but when we are faced with a challenge, a shift of perspective can often lead to even greater personal and financial rewards.
This is the intention behind my article and why I created a 20 step plan to help you to protect your income and wealth moving forward. I have also linked a video below that explains why I believe we’re entering an economic recession in 2020 if you would like further context.
Firstly, what does furlough mean?
It means your employer will not pay your regular monthly salary over a set period of time, but technically, you are still their ‘valued’ employee…
Very confusing, I know; I’ll break it down more clearly below:
- You are legally classified as an employee by your employer (you have not been fired!).
- But, during this furlough period, your monthly salary (your cash flow) may be significantly impacted in the following ways:
- You may not receive any salary.
- Or, you may only receive a small percentage of you regular salary.
- Or, your Government and employer may come together to pay your salary (however, this could still be a reduced amount).
- Although you may see a reduction in your salary, typically you have access to benefits offered by your employer such as medical insurance etc.
- If your employer’s financial situation does not improve however, you could lose your employment entirely including all entitlements as with any job termination.
But, what does being furloughed really mean for you and your family?
Every individual and family is different, but effectively your monthly income will be reduced (therefore less cash is flowing into your bank account each month).
The distressing factor is that whilst your income has dried up or been severely reduced, your list of monthly expenses probably remains the same (unless you have begun to take proactive steps to reduce your costs already).
This creates a potential monetary imbalance whereby you may be forced to spend more money than you earn in order to keep yourself and your family afloat.
If you are fortunate to have other sources of income that still exceed your monthly expenses, then your strategy (whether intentional or unintentional, is now paying dividends for you!).
If you would like to learn more about the rules of wealth creation later, please read my article here
If you are like most individuals however, it is unlikely that you have an alternate source of consistently dependable income other than your primary salary.
You may be forced to dip into your personal savings in order to help meet your regular expense commitments.
Or, if you are in an especially tight position, you may have zero in personal savings, and potentially, owe more in debt to other institutions and individuals than you have in your bank account.
Take some glimmer of comfort that at least you are not alone, and that millions of people around the world have been furloughed ad are in the same position as you.
I will share my suggestions to help you no matter your personal financial circumstance later in this article and have a list of recommended reading for your consideration after.
Before we go forward, do you understand why you have been furloughed?
If you have been furloughed, I and others appreciate that this is very stressful. But in order to move forward, you need to clearly understand how you have come to be in this position.
Whether you work for the Government, a business, or some variation in between, these organisations need to balance the money that enters their bank accounts with the money that must then leave their bank accounts.
For example, for a business to remain open and functioning, they need to generate more money than they spend, otherwise they’ll go broke by depleting their cash reserves (equivalent to individuals eating away at their life savings if an emergency was to fall upon them).
And therefore, it is absolutely no different to how we as individuals need to balance the money that enters our personal accounts every month with the expenses that we choose to spend our money on (whether its rent, a mortgage, food, school fees etc).
For your employer, the basic ‘profit formula’ impacting their decisions about employees being furloughed is:
Gross Revenue - Operating Costs = Net Profit
Gross revenue can be considered the money an organisation generates, mostly commonly via selling their products and services to customers.
Operating costs are essentially all the costs an organisation must pay to stay operational such as salaries, rents, utilities etc.
And the net profit is the money left over once an organisation deducts their operating costs from their gross revenue.
For example, if a company was to generate ‘100,000’ in a month in ‘Gross Revenue’ from sales, and their ‘Operating Costs’ were ‘80,000’ after they pay all salaries, rents, utilities etc, then the calculation and net profit would be:
Gross Revenue (100,000) - Operating Costs (80,000) = Net Profit (20,000)
In the example above, the company has generated a net profit of 20,000 (this is good), but now the management of this example organisation must answer a very important question – what shall they do with this profit?
They have a few options available to them ranging from:
- Investing the profit to expand their business in the hope they increase revenue, reduce costs and ultimately making even more profit.
- They could choose to ‘bank’ the profit, effectively saving this money to be spent during an emergency at some later point in the future.
- They could give the profit as a reward (typically referred to as a ‘dividend’) to the shareholders or even to the employees (commonly referred to as a ‘bonus’).
- Or they could do a mix and match of all three!
When an organisation enters a difficult period of time, such as what has happened during the Coronavirus Pandemic, the forced lockdowns keep existing and potential new customers at home, restricting the ability of businesses around the world to market and sell their products and services easily.
This is then made worse and compounded further by employees being furloughed or terminated. At the end of the day, all employees are existing and potential customers for someones organisation or business.
If as a collective the global population are not getting paid by their employers, customers then have less disposable money to purchase services and products – it becomes a chicken and egg scenario which quickly spirals downwards.
Overall, this creates a serious problem as many organisations rely on ‘sales’ as their ‘gross revenue’ in the formulas above.
So, let’s now say this same organisation has seen their gross revenue from sales being reduced by 50% due to a crisis, let’s see how much net profit remains…
Gross Revenue (50,000) - Operating Costs (80,000) = Net Profit (-30,000)
By looking at the example above, you’ll see that a 50% reduction in sales causes the organisation’s gross revenue to drop from 100,000 to 50,000.
The real catch however is that the company’s ‘operating costs’ have not dropped, they remained the same (80,000) as the management of this company have not had the time to make emergency adjustments to counter the 50% drop in sales and gross revenue (I’ll come back to explain what these ‘adjustments’ can be).
Therefore, the organisation now has generated a ‘negative’ net profit (-30,000 or minus 30,000). What does this mean?
It means this organisation has spent more money than it made through sales, and is now running a loss. The organisation would have had to rely on its cash reserves (savings) in order to pay its expenses that month if it wanted to keep operating.
Now you see, just like an individual living off their personal savings when they lose their income, an organisation running a loss every month like in the examples above would most likely eat away at all of their cash reserves and eventually be forced to close down.
Let’s get back to the ‘adjustments’
When you operate a business, from time to time, you’re going to have a loss (a negative figure appearing in the net profit column of the formula above).
This is quite normal and there are many reasons why this could happen, but the main point is that managers of all organisations do not want to have too many of these monthly losses in a row as this increases the risk that they will deplete their cash reserves and ultimately force them to close down (as discussed earlier).
In a ‘normal’ global economic climate, the cause for a loss in a given month could just be attributed to regular business reasons, but during a major global recession (depression as in the case with the Corona Pandemic), the management of organisations know realistically that their gross revenues from sales will most likely A) be seriously reduced due to less customer demand for their products and services, and then B) their gross revenues from sales will stay down for a long period of time (they won’t recover back to ‘normal’ levels any time soon).
This realisation forces managers to have to balance the profit formula by bringing down the value of the ‘operating costs’ in order to at least break even in terms of profit (where gross revenues match operating costs), or ideally, generate a profit once again (where gross revenues can again be greater than operating costs).
When a management team knows they cannot realistically increase sales and gross revenues due to a global crisis, they are forced to make ‘adjustments’ to their operating costs in the formula.
By ‘adjustments’ I mean they have the option to ‘lower’ their operating costs.
For many organisations globally, their highest operating cost is the salaries of their employees, this is why you see many organisations fire employees when they enter a crisis (it’s their attempt to balance the profit formula to ensure their gross revenues are higher than their operating costs).
So, using the same example from earlier, if this organisation was to reduce their staff with the intention to effectively lower their operating costs by at least 50%, let’s look to see how their profit calculation works again:
Gross Revenue (50,000) - Operating Costs (40,000) = Net Profit (10,000)
What we see now is that this organisation is again profitable! It’s not as much profit as they were experiencing before this troubling time, but it still means they can keep their organisation running.
But wait! You weren’t fired, you were furloughed.
Great observation, in the example above, we said the organisation reduced their operating costs by 50% as they fired a number of their employees.
In your case, you have either been furloughed or have been informed to expect to be imminently furloughed.
The question now is why would an organisation technically keep you as an ‘employee’ when they know realistically the global economy is not going to improve?
Why not just immediately fire you? The reason why has to do with three factors:
- Timing
- Financial impact
- Government legislation
Timing
As a manager of an organisation, when a sudden crisis hits your organisation (again as with the Corona Pandemic), they do not know exactly how long it will take for their business to recover.
Therefore, they want to gather more data before jumping the gun and terminating employees.
What if the crisis eases and customer demand improves considerably, but there are no longer an adequate number of employees to meet this increased customer demand?
The organisation may end up doing irreparable damage to their brand not being able to satisfy customer expectations.
Also, it takes a considerable amount of time, effort and money to source, hire and train employees so that they can do their jobs well. If managers were to immediately fire their experienced employees at the first sign of a crisis, it would cost considerable amounts of time, effort and money to bring new replacements on board once the crisis passes.
Amazon experienced a similar situation in March and April of 2020 where they had too few employees to meet the massive customer demand brought about by the Corona Pandemic and people increasing their online shopping as a result.
This is why management decides to enroll their employees into a ‘furloughed status’ – they get the benefit of reducing their salary bill of the organisation, which in turn lowers the organisation’s operating costs to protect the profitability of the organisation (to keep it ticking over and avoiding closing down).
In addition, by not firing you, if the crisis averts and consumer demand raises again, they can quickly ‘re-activate’ you minimizing the money needed to hire new replacements.
These actions by managers may seem to be at the expense of the employees, but in reality they’re not. At the end of the day, if an organisation cannot remain profitable, they’ll eventually need to close down resulting in guaranteed job losses for all.
The furlough mechanism is a compromise to retain staff with some form of monthly salary, whilst buying time for the organisation to get a better understanding of the true cost of the crisis facing them.
This leads us to the…
Financial Impact
When a crisis strikes an organisation, the immediate impact may not be the full and true impact. By impact I mean a reduction to their sales and gross revenue, or if they have to pay an unplanned bill such as a legal claim.
If an organisation is fortunate, the consequences of a crisis might pass over quickly with little revenue and cost implications, or alternatively, it could be a long drawn out drain on the organisation.
Given the Coronavirus Pandemic, few businesses today have ever experienced trying to operate in such an unprecedented global situation.
Therefore, managers have no prior playbook or case study to refer to in order to project the financial damage they may be in for.
In month 1 of a crisis, they could see sales and gross revenues decrease slightly, with a further decrease in subsequent months, or it could be a sudden drop, of which a slow normalisation of sales improves monthly thereafter – it’s completely unknown!
And for the reasons mentioned under the timing paragraph above, no manager wants to be seen taking excessive decisions purely based on early indicators (especially if the indicators that drove their initial fears turned out to be unwarranted in the long term).
Organisations therefore typically create a phased ‘business continuity plan’ which consists of different actions over the course of a number of months, based on the damage indicators they receive from the market.
To be furloughed is usually in the earlier stages of an organisation’s continuity plan with complete termination of less needed employees in later stages if the overall situation continues to worsen.
Government Legislation
Depending on your country, different Governments have different rules on the treatment of employees in a variety of situations.
In the United States, it is relatively easy for an employer to terminate a worker, however, this is not true in countries such as the Netherlands or France.
Therefore, if your organisation and management reside in a country with strict policies that are aimed to protect the job security of employees, managers may not be able to fire employees even if they wished to (or the process of termination would incur heavy financial costs, not the best news when you’ve already entered a global economic crisis!)
In such circumstances, it’s easier to furlough employees rather than terminating, providing the benefit of reducing monthly operating costs in the form of reduced salary payments, without the financial consequences associated with terminating employees.
Will you lose your job?
Frankly, every business is different, and the conclusion that your management takes is based on a variety of factors including but not limited solely to the ones mentioned above.
But ultimately, an organisation cannot run indefinitely making losses unless they receive outside funding (most commonly in the form of bank or investor loans, government bailouts and or company mergers and acquisitions).
It is therefore in your best interest to plan for the worst, and hope for the best. Now that I have explained what furlough means and the true implications it can have on you and your family, I will divert my attention on helping you navigate this period.
What should you do if you have been furloughed?
If you have been furloughed, or believed you shall be made so soon, take immediate action; do not let complacency or hope alone guide your decisions.
As mentioned earlier, it’s best to have your own ‘continuity plan’ of action in place in the hope it is not needed, rather than to be caught in a predicament with no concrete strategy to protect yourself and your family.
Here are some of my recommendations, but as always with finance, there is no silver bullet strategy.
Research time proven strategies from credible authorities (pick up books, start online courses, speak to individuals that are more financially secure to share strategies and so on)
- Create a Personal Income Statement Whether using Excel, Google Sheets, or on a good old fashioned notepad, write down at the top how much money you can expect to bring in per month whether as an individual, a couple or a family; this is your ‘gross revenue’.
- Then underneath, start listing your monthly expenses, everything from major costs such as mortgages and rents, to the most insignificant of fees such as your Netflix subscription! List it all, do not miss a single expense; this is now your ‘operating costs’.
- Apply the profit formula Then, follow the profit formula detailed earlier in this article by subtracting your ‘operating costs’ from your ‘gross revenues’ to reveal your ‘net profit’ – if the figure is positive (as in you still have money left over after you have paid all your monthly expenses), then this is a great sign to build upon further to increase your profit figure. If it is negative, do not panic, but for both eventualities, we now need to focus on stabilizing or even enhancing the profit formula by creating your…
- Continuity Plan You’ll need two versions of this plan ideally; one to guide you if you have some income and the other if you have zero income (even if you have only been furloughed, there’s a possibility you may eventually be terminated if circumstances worsen for your organization, so it’s best to prepare for this potential predicament also).
- Cut non-essential expenses If you have an income still, begin to remove all non-essential expenses until your gross revenue matches the operating costs. You may need to make some hard adjustments here, but obviously prioritize your ‘living expenses’ such as rents / mortgages, groceries, internet and other utilities.
- If you have no income at all, you must accept the reality that it’s best to cut absolutely all expenses other than the costs that A) keep you housed, clothed, children schooled and essentially keep yourself alive! B) keep the provisions needed to help you either source new employment or to create your own income moving forward (such as internet, phone and transport expenses).
- Take action Once you have balanced the profit formula for your particular circumstance, and are aware of the expenses you can cut and in which order based on the progression of your furlough status, start implementing your continuity plans and make the relevant cuts where needed.
- Protect your current wealth For those with cash savings, consider converting 10-30% to physical silver & gold – do not think of this as an expense, silver and gold is also money (therefore you are just ‘converting’ fiat currency into physical money) – for most of you, your governments have actual silver and gold coins for sale (not the cheap copper / nickel variations that are in mainstream circulation) – to learn more, research ‘silver and gold as hedges during instability’.
- Understand Wealth Cycles At the time of writing, silver is currently significantly undervalued compared to gold which is great for investment, it is also much cheaper to buy 1 ounce of silver vs 1 ounce of gold for those will limited cash – to learn more about this, research the ‘gold / silver ratio’. Also, I recommend to watch this video about ‘wealth cycles’
- Spread your assets Consider not keeping all of your cash in a single bank account, withdraw a portion and keep at home in the event that banks begin to close or begin to limit withdrawals / transfers (maybe keep 1-2 months worth of cash at home) – if you want recent examples where this happened, look at Greece in 2015-2018 and Lebanon today.
- Consider spreading remaining cash across different bank brands locally and even internationally if possible.
- Currencies not pegged to the US Dollar may lose their value during a deflationary economic cycle (such as in a recession or worse, a depression). For people outside the USA, consider taking a portion of your local currency and converting it to US Dollars as its value could continue to rise during a deflationary period – research ‘what is deflation and inflation’ to learn more.
- Keep an eye on house prices regularly in your area, you may begin to see significant price drops in most areas creating good opportunities to buy and rent properties out for additional sources of income – research the ‘historical price index for houses’ in your area to see if they’re extremely high vs the historical average (this can indicate they’re in a bubble which may crash moving forward).
- Likewise, if you have been building a lot of equity in your personal home and base your net wealth on current property prices, a reduction in property prices could hurt you (consider selling high, and renting during the house price fall, and then buy a new cheaper home once prices are near the bottom) – really, really research this before making any decision as the negative and positive consequences can be significant.
- Stay safe If you plan to store any cash or precious metals at home, the golden rule is to tell absolutely no one – not family, not friends, not work colleagues and not even insurance companies.
- Be wary of the stock market If you have invested in a saving fund, whether with your bank or a private institution, there is a strong likelihood that your money is tied to the performance of the stock market (global markets crashed 30% in Feb. 2020, then had their greatest recovery in March 2020 due to central banks injecting new cash called ‘quantitative easing’ – there are multiple schools of thought on what you should do in this situation (such as withdraw your investments, even at a loss with the aim to re-invest later, or simply to hold your investment for the long-term rebound) – but, I suggest to research this thoroughly and come to your own conclusion – some investment schemes may not guarantee you capital investment or the interest earned at all if the markets crash hard or the institution you invest with fails.
- Sadly, there’s no guarantee Ultimately, there is no sure proof way to protect your money completely, they all carry risk, but if you choose to research the points above, you may be able to determine a strategy that’s right for you and your family – finally, seek professional advice from a registered ‘fiduciary’ in the matters of wealth before taking anything.
- New or Alternative Income Sources Maybe you were able to balance the profit formula, or maybe it’s still in the negative, either way, you can also improve your monthly profit (savings) by increasing your income.
- Is it possible for you to take on additional work from sectors still in high demand (such as healthcare, or food retailers)? There are literally thousands of income generating activities and they’re only a Google search away.
- Do you have a skill that you once considered only a hobby? Maybe there’s a niche market for it and people are willing to pay accordingly? Start learning how to market and sell yourself – once again, there are thousands of guides how to create your side business at virtually zero expense. Check out Chris Guillebeau as a starting point.
Moving forward
This article is only intended to shed more light for those that have been furloughed and therefore the recommendations shared are only scratching the surface and are based purely on my personal experience.
However, I hope it has given you food for thought, of which, I know that for any change you make now, the advice from this action plan will carry you through for the remaining years of your life.
If you have any questions, please do not hesitate to get in touch.
End.
