So much of personal finance is looking forward. You figure out what you have, what you need, and you plan and plot as to how you are going to get from point A to point B. Most of the fun comes from planning for vacations and houses, or calculating what date you will become debt free. It is always nice to glimpse into the future and see a brighter and better life. However, as we all know, the future is not always so rosy. That’s why we suggest having an emergency fund, so that you can cover yourself for when things inevitable go wrong. A big question that needs to be asked, and often isn’t, is what loss would cripple you?
Most emergency funds and plans are in place for those types of situations that seem to crop up in batches. Your car’s engine dies, your pet gets sick, or you get robbed or stranded. You have a set amount of money set aside to cover for those sorts of things. Worst case scenario, you lose your job, but you have 3 or 6 months of funds in your emergency fund to cover you while you find other work. Those things, however, won’t cripple you. What would?
Ask Tough Questions
If you are a one-income family, perhaps losing that job is a much bigger deal than you realize. What if you can’t find work for 6+ months? Would that financially cripple you? What if you get sick, or injured? How badly would your family suffer financially if you were put into that situation? How close are you to financial ruin? Are you able to find other sources of income? What is your greatest asset? Is it your health? Is it your job’s salary or benefit plan? If you lost it, what would you do?
Seek Help
Figure out how to cover yourself if you were to become financially crippled. Speak with friends, family, and see how much they can cover you if necessary. This doesn’t mean that you are going to ask them to write you a cheque, but you might want to know if they would have space to store some of your things, or perhaps even an extra room or two that you could borrow for a little while.
Protect Yourself
Write down what avenues can you take to protect your financial situation if the worst was to happen. Who you can talk to, if you have to call your bank or stock manager, everything that would suddenly become an option. Make a list of everything you can cut out of your life to minimize the lost. Prioritize bills so you know which ones you will pay if you can’t afford them all.
Solve Problems
For any of your potential crippling scenarios, what steps can you take right now in order to solve those problems? Would a slightly larger emergency fund give you just enough time to deal with whatever financial crisis comes, then do it. You’re better safe than sorry. Would making a will, or re-drafting your existing one, solve a different potential crisis? Do you need more, or better house, vehicle, or life insurance?
These aren’t easy questions, and they aren’t inexpensive answers. But they just might provide you with the peace of mind to deal with life’s worst scenarios.
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Alan Schram writes about personal finance and his encounters with it in his everyday life. Alan is recently married and is looking to save money on expenses and reduce his debts.
We *still* need to get our wills done. With lil’ SPF on the way in October we thought it may be smarter to get the will done then so we don’t have to pay a lawyer twice in the same year. Not sure if this is folly or not …
Loss of job! I have enough money to survive, retire etc. I turn 65 this year and I want to keep working for several reasons. One of which I do not have enough years for my pension. I started teaching 10 years ago and like it. The pension is an additional source of income, but more importantly I am not ready to retire (again).
Great thoughts Alan – thanks!
As a very young graduate supporting a partner who will be a student for two more years I am in a fairly precarious position in terms of what it would take to cripple me. On the bright side I have no debt except for my mortgage and live rurally, so I am quickly becoming less and less vulnerable. I also have very very solid job security. For the time being however, any sort of shot to my income would be very difficult for me to stomach over a mid-to-long term.
I don’t think the future is any rosy especially here in the States. Millions of folks are heavily in debt, millions have declared bankruptcy. Many have lost jobs. Their retirement accounts have dived like an eagle diving for a small bird. The recession may be almost over but only for companies that are experiencing record profits but they are way off the path on hiring.
They said its simple but not easy. For the average person it’s just not that easy. but I guess that’s why we have blogs like this one – to get us over average
Virata Gamany
All about insurance baby! Don’t skimp!
Great points! Seven years ago, I working working as a marketing director, had just published my first book and was starting to do more and more speaking events and freelance writing. Then I slipped on some ice and sustained a brain injury. I look fine, but can no longer work due to intense headaches that last for week at a time and hyposomnia, which mean I need to sleep 10 hours a day in order to function decently. I also have vision issues that prevent me from driving when it’s dark or rainy. Worst of all, my executive function abilities (which allow you to organize thoughts, be creative, generate ideas, make decisions), etc. were hardest hit and my writing career is over. At the time of my injury, I had no debt except my mortgage, about 4 months emergency fund, a healthy retirement account, and long term disability insurance at work. Despite all that, when it became clear that I would not be able to return to work, my LTD did not kick in (7 years later…I STILL have my lawyer battled it out). I used up my savings, maxed my credit cards, cashed out my retirement, got married, used up my new husband’s savings before losing my house, and waited 4 years for Social Security to get approved.
It’s easy to think about the temporary setbacks: job loss, short term illness, but not the long term ones. We’re often more prepared for our death than our long term incapacity. I did everything right, and still lost everything. The only thing I would add is to make sure you have a guardianship set up if you have kids.
Great topic and article! Most people avoid thinking about preplanning for unpleasant issues, such as emergencies and wills. From personal experience worst case scenario planning is worth spending a lot of time on, especially when such situations occur, you are able to deal with them and not worry about finances (last thing you want to deal with when those situations pop up).
All about the basics!
- Face up to the facts
- Generate income
- Reduce unnecessary spending
- Protect your assets
- Get advice
I didn’t set budget for home maintenance & repair costs. Fortunately I did save enough money to cover it. Lesson Learns.
Yeah… often its a close encounter. Always good to plan more and plan for the unknown. I’m not a believer of luck but sometimes you just get tossed the unwanted sides…
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On the ablaze ancillary I accept no debt except for my mortgage and alive rurally, so I am bound acceptable beneath and beneath vulnerable. I additionally accept actual actual solid job security. For the time actuality however, any array of attempt to my assets would be actual difficult for me to abdomen over a mid-to-long term.