Shock-Proof Your Finances
Here are 10 tips on how to prepare financially for a calamity, so you won't have to make life-altering decisions when you are emotionally vulnerable
The unexpected death of a partner. A sudden layoff from a long-time job. A serious illness or accident. These life events can throw your finances in disarray as you cope with a big decline in income. Routine monthly bills including auto loans and mortgages may be difficult to pay, and you may struggle to pay your tax bills.
Here are 10 tips on how to bounce back and shock-proof your finances.
1. Get serious about your budget. Digging into the details of cash flow will give a clear picture of the state of your finances. It is the first step to bouncing back after a financial shock.
"You shouldn't underestimate the feeling of empowerment that can come simply from being in control of your cash flow."
"I think you shouldn't underestimate the feeling of empowerment that can come simply from being in control of your cash flow," says Alina Fisch, a Chartered Financial Analyst and founder of Contessa Capital Advisors, a New York firm that specializes in single mothers. "This starts with a detailed assessment of non-discretionary costs: housing, insurance, groceries, transportation and income.
"Get that under control and it will give you breathing room to build," she adds. "Then you can look around and identify work skills that can be updated, networking opportunities, make a plan for saving and investing for the future."
2. Attend to your mental, emotional health. Financial shocks can have a negative impact on more than your wallet. Take the time to take care of your health as you rebound for the next step.
"A huge priority in my opinion is to focus on mental and physical wellness, getting enough sleep, drinking enough water, connecting with friends, reconnecting with nature or a spiritual practice etc." Fisch says. "That's the foundation for resilience."
"Build an emergency fund that's big enough to carry you through at least six to 12 months of looking for a new job."
3. Tap an emergency fund. Having cash that is readily available should you suffer a financial shock can go a long way in protecting your bottom line. And you'll have months rather than weeks to plan your next financial and career steps.
So, use emergency savings, if you have it, in the wake of a financial shock. When you are back on your feet financially, be sure to replenish this important fund. You never know when you may need to use it again.
"Build an emergency fund that's big enough to carry you through at least six to 12 months of looking for a new job," Fisch says.
4. Focus on finances. Increasing your household income should be a top priority after a job loss.
"You should reduce your spending as much as possible."
"If a layoff does occur, the number one focus should be to replace your income," says Brian Duncanson, a financial planner in Vero Beach, Florida. "Having an updated resume with in-demand skills will help shorten the unemployment period."
"You should reduce your spending as much as possible, cutting back on all unnecessary expenses," he adds. "You will want to file for unemployment benefits. While these are typically not enough to replace your income, every dollar helps."
5. Widen your job search. Even part-time or temporary employment can help you stay afloat while you look for a full-time job.
"Looking for contract or part-time work can add significant benefits to your finances in those months after the loss," says Ryan Derousseau, a Certified Financial Planner at United Financial Planning Group in New York. "First, your organization may be open to contract work. Second, you can lean on past colleagues who likely have moved to other organizations and have work they need done."
6. Keep your health care coverage. Make room in your budget to maintain health care coverage when you are job searching. You can stay on your old company's plan for 18 months. Short term health plans and coverage made available by the Affordable Care Act, sometimes referred to as ObamaCare, are other options to consider.
"Preventative health will save money in the long run."
"If you had a company plan, you can continue that plan for up to 18 months, but you will need to pay 102% of the premiums," Duncanson says. Once you find another job, you will need to enroll in your new employer's benefit plans. "You may also need to revisit your budget to adapt to your new income," he adds.
Don't forget to maintain your preventative care doctor appointments and health screenings. "Stay on schedule with doctor appointments — preventative health care will save money in the long run," Fisch says.
7. Prep financially for the loss of a loved one. Prepare your family for the financial impact of losing a loved one by purchasing life insurance. It is especially important for family wage earners to have this coverage.
"It's vital to prepare for this possibility before it happens."
"The blow of a loss of a loved one can have a significant impact on the finances," Derousseau says. "Not only are you mourning your partner, but you're also facing financial decisions that the person handled or provided for while living.
"It's vital to prepare for this possibility before it happens. Using term life insurance can be an important protection from this, since you can have a cheap backstop in place, just in case." he adds. "This allows you room to mourn and prevents additional stress — like the potential loss of your home — to an already stressful scenario."
8. Shock-proof your estate for your heirs. Do proper estate planning and it will make it easier for your family to gain access to your accounts after you die.
"It's important to have both yours and your partner's estate in order," Derousseau explains. "This means having proper beneficiaries listed on bank accounts or investment accounts and ensuring the right titling on any real estate or other assets. That way, if the unexpected happens, you'll be able to access financial accounts easier and not have to wait for it to go through probate courts before you gain access to anything."
9. Insure your valuables and property. Protect your home from the dangers of natural disasters with insurance coverage.
"Say you're living in a place where there's flooding, hurricanes or earthquakes," says Lynnette Khalfani-Cox, author of "Bounce Back: The Ultimate Guide to Financial Resilience." "It's wise to protect your valuables and property with appropriate insurance."
10. Prepare for a layoff. A job layoff could happen to you and more than once. Take steps to prepare.
"Always keep your skills up to date, as well as your resume; constantly network and look for opportunities for job cross-training."
"In looking at your risk of job loss, for instance, don't just think 'A layoff could never happen to me' or 'I'm so invaluable to my company, my job is safe.' That's short-sighted and unrealistic," Khalfani-Cox says.
"A better approach is to always keep your skills up to date, as well as your resume; constantly network and look for opportunities for job cross-training. That way, if you are faced with a job termination, you're better prepared for what lies ahead."
