Wednesday, January 7, 2009

Prepare For The Unexpected

Tip #49 - Prepare For The Unexpected. This sounds like such a cliche. And it is. For good reason. None of us know what the future has in store for us. A job layoff? Illness? Another child? A car accident? Many of these things can happen at any moment. How will your finances hold up if one of these happens? Will you be able to survive on your regular path? Will you be able to manage on a different path? Or will one of these changes devestate you financially?

Let's look at an example. Suppose your air conditioning unit gives out. If you have the $2,000 it costs to replace it with a new unit, your life goes on its regular path. Or suppose you only have $800 saved but are fortunate enough to to find a used unit? This can tide you over for a few years. But what if you have nothing saved? You will have to manage on a different path. You live without air conditioning. Fortunately, the failure of an air conditioning unit shouldn't devestate you financially.

But what if you lost your job? If you have money saved, you may be able to cover your expenses until you find a new job. If you don't have money saved, you may be able to live off your spouse's income by drastically cutting expenses until you find a new job. If you have no money saved, losing your job may devestate you financially. Your spouse may have a very low paying job that even with cutting expenses you cannot live off his or her income. If this happens, you can go into debt or get behind on your bills until bad becomes worse.

What should you do so one event doesn't devestate you financially? To steal the Boy Scouts' motto, "Be Prepared." First and foremost you should have an emergency savings fund. Financial experts often recommend having a savings fund to cover 3-6 months' worth of expenses. So if you normally spend $3000 per month on expenses, then you should have between $9,000 and $18,000 socked away in a savings account - money you can get to pretty easily if you need it. Oftentimes you won't need all of it. If the air conditioning unit in your house gives out and you need $2,000 to replace it, take it out of your emergency fund and life goes on and you can slowly build your emergency fund back up. A car accident in which your car is totaled will take more money. You may collect money from your insurance, but it often doesn't cover the cost of a new car. So you have to come up with the difference which may be $5,000.

But what happens if you are laid off? You may be given two weeks' severance pay and then you have no income coming in. This is when an emergency fund really comes in handy. This is when you have to live off your fund until you find a new job. Depending on the market, it could take several months which is why it is a good idea to have several months worth of expenses saved. By being prepared you can prevent yourself from going in financial ruin.

Suppose you don't have 3-6 months' worth of expenses saved? Well, in addition to establishing an emergency fund, try to think of a back-up plan until you have that fund in place. Think about a plan before the unexpected happens. What will you do if your car suddenly doesn't work any more and you cannot afford a new one? Can you take the bus to work for a year? Can you commute with a neighbor? If your spouse loses his job, do you have ideas on how you can make money? Do you know what expenses can be cut out immediately to reduce your liabilities?

In addition to just reacting to events that happen, you can try to predict what events are coming your way. If you know your roof is old, then you can expect in the next few years that you will need to replace it. If you are hearing some grumbling at work about layoffs, then you can start feeling out the job market. If your car has been in the shop a lot in the past year, then you should think about how you will replace it. Then some of these "unexpected" events won't be so unexpected.

Remember, unexpected events happens all of the time. Cars break down, roofs start leaking, and people get ill or lose their jobs. Try to be as best prepared as you can be for them.

In Real Life (IRL) - Our air conditioning unit broke a month ago in our condo in Florida. After calling several places, I was able to find a reputable installer to put one in for $2,000. To be honest, I didn't see this expense coming. And I should have. After all, the unit was 35 years old! But it's there in Florida and I'm here in Virginia, and I don't usually give that condo much thought. I think of it as my mother-in-law's since she stays there. But the deal is that we handle the upkeep and maintenace of it. So we begrudingly handed over $2,000 for a new air conditioning unit. Fortunately, we have money saved for such "emergencies." But now we do have to replenish our emergency fund.

A few years ago we bought a new roof. Fortunately, we knew this unexpected event was coming. My husband is handy, and he had been repairing the holes and leaks as they literally sprang up. But after a few years of doing this, we knew that it was time to get a new roof. Because we knew it was coming, we had the money for it. When we bought our home, we didn't use all of our money for a down payment. We left $20,000 aside for repairs and maintenance. So while we did keep putting off replacing the roof, we finally parted with our money and hired someone to put on a new one. If we didn't have that savings, we probably could have muddled along for a few more years. But we had a plan in place for this "unexpected" event.

We are in another situation now that we are trying to prepare for. It is a possible shut-down of my husband's office. The writing has been on the wall for a few years. His office isn't performing up to speed. And my husband thinks it's a possibility that the main office of his company will close down his branch. We do feel that he won't lose his job altogether but we know there is a possibility he would be moved to the main branch of his office in another state. So we are preparing ourselves for this possibility. We are preparing ourselves mentally that a move may be in our future. We are preparing our house physically by keeping on top of repairs so we can hopefully sell it fairly quickly if we need to. And we are preparing ourselves logically by looking into other possibilities for a job if we don't want to make the move. One option is that I go back to work full-time. And while I don't make as much as my husband does, it will relieve some of the pressure on him. It would be easier for him to find a lower-paying job if he needs to find one. And if none of these options happen, we do have an emergency fund in place. It has about 6 months' worth of expenses in it so we would be okay for the short-term.

I'll share one more "real life" story. When I was younger I had a friend whose dad lost his job. We lived in Pennsylvania and the one job offer he received was in South Carolina. Her family really did not want to move as their extended family all lived nearby. But they would if they had to. But instead, they decided to have her mother open up a business. It wasn't a totally spontaneous decision. She had a small business out of her home personalizing jewelry and ceramics. It was a hobby or a side job so they decided to expand it and live off the business income. They started with a kiosk in a mall. And then they opened up in a retail store in a small downtown business district. My friend's name came up in conversation a few weeks ago, and I decided to google her mother's business. Sure enough, it is still there - 25 years later! I'm guessing that opening this business was something they had always talked about. Otherwise I don't think they would have jumped into it so quickly. By having a plan for an unexpected emergency, they were able to follow another path financially without being devestated. What preparations have you done?

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