By: Marigny deMauriac, CFP®, CEPA®, ABFP®, AAMS®

A government shutdown can be extremely unsettling, but with the right preparation, it doesn’t need to throw your financial life totally off course. While it might not happen every year, it's something we’ve seen many times before. As someone who has weathered countless economic ups and downs, I’ve learned that the key to handling uncertainty is always having a solid backup plan.

What Is a Government Shutdown?

A government shutdown happens when Congress and the President essentially can’t agree on a budget. When the legislative branch does not pass key bills which fund or authorize the operations of the executive branch, resulting in the cessation of some or all operations of a government. Government shutdowns in the United States have occurred periodically since 1980, and are the result of failure to pass appropriations bills before the previous ones expire. 

When this occurs, certain parts of the government stop functioning because there’s no agreement on funding them. Some services, like national parks or museums, may close, and federal workers would not get paid for a period of time. It’s essentially a freeze in government operations until a new spending plan is worked out. Non-essential workers are furloughed, and only essential employees may remain in departments covering the safety of human life and/or protection of property.

How Many Times Has This Happened?

• Number of shutdowns: Since the enactment of the current U.S. budget and appropriations process in 1976, there have been a total of 23 government shutdowns (as of March 2025).
• Shutdowns with furloughed employees: Out of the 23 shutdowns, 10 led to federal employees being furloughed (temporarily sent home without pay or required to work without pay).
• Longest shutdown: The longest shutdown in U.S. history lasted 35 days, from December 2018 to January 2019. This shutdown occurred during the last Trump administration and was primarily caused by a dispute over funding for the U.S.-Mexico border wall. The 2018-2019 shutdown furloughed roughly 800,000 of the federal government's 2.2 million employees.
• Impact of shutdowns: Shutdowns can cause significant disruptions, including the furloughing of federal employees and delays in government services, leading to uncertainty in the markets and the economy.

What Could It Mean in 2025?

Potential Government Shutdown in 2025:

• Likely to cause delays in non-essential services and federal employee layoffs
• Essential services (e.g., defense, law enforcement) will continue

Key Upcoming Congressional Battles:

• President Trump pushing for more tax cuts and increased spending on border security and defense.
• Tax cuts from 2017 are set to expire and Trump wants them extended.

Impact on National Debt:

• Experts say tax changes could increase the national debt by $5 trillion to $11 trillion, raising borrowing costs.
• Interest payments already take up 13% of the $6.8 trillion budget and are expected to grow to 17% in 10 years.

Republican Budget Plan:

• Proposes $4.5 trillion in tax cuts and $2 trillion in domestic spending cuts over the next decade.
• Unclear which programs will be affected, with warnings that social programs (like Medicaid) and other critical services may be impacted.

Debt Ceiling Raise:

• Congress likely needs to raise the national debt ceiling soon to avoid a default, which could disrupt global markets and cause a recession.

Market Reactions:

• A shutdown (or potential for a shutdown) coupled with tariff wars will cause short-term market volatility.
• History shows market uncertainty is temporary, and things tend to stabilize once a deal is reached.

How to Prepare Your Finances

1. Build Up an Emergency Fund: If there’s one thing I’ve learned, it’s that you can’t predict everything, but you can prepare. A good emergency fund is your financial cushion when unexpected events happen, whether it’s a government shutdown or something else. Ideally, your emergency fund should cover six months of living expenses at a minimum. The peace of mind it offers during uncertain times is worth it.

2. Be Cautious with Spending When Uncertainty Looms: It’s important to tighten up on spending. Focus on what you need rather than what you want. If the shutdown impacts your family’s income, having a buffer in savings will make sure you don’t have to sacrifice the essentials.

3. Understand How Markets React: While the stock market might dip during a government shutdown, history shows that it has tended to recover over time. The key is not to panic and sell during a market correction. Rather, it’s about staying the course and sticking to your long-term strategy. Markets are volatile in the short term. It's the price we pay for investing for long-term growth.

4. Invest for the Long Term: Young people, start thinking about investing EARLY. A government shutdown or any other short-term event shouldn’t make you lose sight of your long-term goals. In fact, if you’re investing in a 401(k) or other retirement accounts, a dip in the market could be a good opportunity to buy shares at a discount for investors with a longer time horizon. For those nearing or in retirement, a review of risk in your current portfolio is always prudent to make sure it is still aligned with your financial needs.

How Have Markets Reacted in the Past?

In previous shutdowns, stock markets have experienced drops in the short term as uncertainty creates fear. But markets don’t stay down forever. In fact, over the long term, they tend to bounce back and often grow even stronger. In the 2013 shutdown, the market took a hit, but by the end of the year, it had recovered and then some.

Final Thoughts

• Government shutdowns and other events happen from time to time.
• We aim to be rational investors, with a long-term, diversified portfolio of stocks, bonds, and cash. 
• But market volatility, like a big drop in the Dow, can shift our perspective. 
• Market swings are driven by factors like trade deals, national debt, interest rates, and even pandemics.
• Dramatic headlines make it hard to stay rational in the face of volatility.

Humans are hardwired to REACT:

• The reactive brain responds in 12 milliseconds.
• The reflective brain takes 40 milliseconds, over three times longer.
• By the time the reflective brain catches up, the reactive brain has often taken control.
• First, realize that your brain has two parts involved in decision-making: the reactive and reflective systems.
• Second, when volatility strikes, your reactive brain can overpower and even shut down your reflective brain.
• When the reactive brain takes over, you're more likely to make emotionally-based decisions.

The reactive brain can lead to:

• Psychological traps, triggers, and misconceptions.
• Irrational decisions, like buying and selling at the wrong times.
• Underperformance in investments.

Despite frequent predictions and repeated verbatim predictions of global disaster, markets have remained resilient to extreme forecasts. When the market drops by 30%, our reactive instincts might push us to adjust our portfolios, like the Reactionary Investor shown in the graph above. Historically, these panic-driven decisions have hurt long-term investment returns and that's the price we pay for panic.

Past performance does not guarantee future results. Equity returns are based on the S&P 500 Index, bond returns on the Bloomberg Long-Term US Treasury Index. The Reactionary strategy involved shifting investments from the S&P 500 to 90-day T-Bills during market drops and back to the S&P 500 two years later. Balanced returns are from a 50% S&P 500 and 50% bond mix. Cash returns are from 90-day T-Bills. Data Source: Ned Davis Research, 12/19. Indices are unmanaged and not available for direct investment.

Don’t be caught off guard:

• Have an emergency fund so you don't rely on selling investments when they are down.
• Be mindful of your spending and curb spending, if possible.
• Don’t panic during market downturns—they’re an normal and frequent part of investing. 
• Financial success comes from handling setbacks with patience and discipline.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.