We, and many others before us, have thought long and hard about how to prepare our homes and families for the worst. We think about natural disasters, human-caused tragedies, and general emergencies.
Just as important perhaps is the small disruptions to your personal life, not wide scale hurricanes but the loss of a job. There doesn’t need to be a terrorist attack for your car to break down and need repairs. Societal collapse is not the only thing that could cause you to want a little extra cash on hand.
Financial Preparedness is about preparing your finances for the small disruptions and emergencies that come with everyday life. This will be hard for many people, especially those living paycheck to paycheck.
But in reality, most people it seems are only 1-3 paychecks away from homelessness. And I would guess that even if it isn’t true now in their life, most people could probably point to a time in their life when it was true.How can you financially prepare your family?
7 Things for Financial Preparedness
# 1 Have Extra Cash on Hand
Cash is good to have in an emergency when the bank is closed, or when there is a power outage at the ATM. (Prepare for power outages here.) Or even just when you are running late and need cash now!
I keep it stashed away, $40 in the back of my phone case, $60 in my glove box. $100 in small bills in my 72-hr bag, $20 in my dresser (mostly for laundry). I didn’t go and take out hundreds of dollars in cash all at once. It happened over time, over many paychecks.
#2 Set aside emergency funds
Are you 1-3 paychecks away from homelessness? Or at least 1-3 paychecks away from not being able to pay rent? Financial experts say you should aim for at least 3 months of your paycheck set aside if you lose your job.
But really, you should have however many months you think it would take to find another job. If you expect it to take 6 months to find a new job in your town, then try to save up 6 months worth of salary. It’s really hard. I know, especially with debt.
#3 Get out of Debt
Getting out of debt is hard. For some people staying out of debt is hard too. But if we are thinking about hard times ahead, it’s much easier to smooth through a job loss in the household if you aren’t controlled by debt. I mean credit cards, car loans, student loans, private loans, etc.
Debt traps you and robs you of your freedom. It also robs you of money as you pay interest on the loans. So work at paying down your debt, and focus on not creating more debt.
I understand you may need a car to drive to work, to pay for the car. But you could drive an older car vs a newer car. The older car will cost less in the loan, while it burns the same gas and gets you to the same place as the newer car.
Mortgage: good debt vs bad debt? There are folks who think your home is good debt since that money would otherwise be going to a landlord and with a house, you are building equity in the home.
However, stop paying your mortgage and the bank comes after you. Housing market crashes and your house is worth less than you own, that isn’t good debt. Can’t sell the home, and your “equity” is useless (although it is land, and they aren’t making more of that).
There are other folks who say the only good debt is debt you take on to purchase an asset that makes you money. Does your home make you money? Does it provide rent from a tenant, or allow you to run a business from within? If it doesn’t, it’s not making you money, and it’s a liability. The debate continues, you will have to find what you are comfortable with.
#4 Get Insurance
I live in Massachusetts, where you need car insurance if you own a car. You will also be charged a fee come tax time if you don’t have health insurance. I also hold renter’s insurance in place of homeowner’s insurance. But would I buy these insurances if I wasn’t legally obligated to?
Yes, I would. You hear terrible stories of family going into massive debt due to an injury, even with health insurance. Car accidents can be partially expensive, especially if you are found to be at fault. Homeowner’s/renter’s insurance covers damage to your property and accidents inside.
I would say, you worked hard to get these high expense items, you should protect them. But really read your insurance, know what is covered and what isn’t.
Pet insurance? Hm…not sure. These days vet bills can be as high as human medical bills but come less often. But your pets are family too.
#5 Save for Retirement
Alrighty, this is something of a touchy subject in politics lately. That aside, let’s assume, that social security doesn’t exist, as this is something of a worst-case scenario for many. Do you want to retire? What does it take to get there?
Many “professionals,” say you should save 10-15% of your salary towards your future retirement. This is all well and good, but the real answer is more nuanced. It requires understanding your current and future lifestyle goals.
The benchmark “professionals” say is you need around $2 million in the bank in order to live off the interest. If you have a pension or expect social security, this counts toward your $2 mil.
If you withdraw 3% in interest a year to cover your expenses, without taping into the principal this gives you with $60k a year. Of course, we are talking about future dollars (account for inflation).
Can you live on $60k a year? Don’t forget you have to pay taxes and likely increased medical bills. You may or may not need to pay rent/mortgage or children tuition. You may also want to travel more or spend more money on hobbies with your new free time.
So the questions becomes, does 10-15% of your salary get you to $2 million in time to retire?
(Of course, I am not financial professional nor a wizard capable of seeing the future. But I am a mathematician, and I can calculate compounding interest.)
# 6 Invest in Yourself First
Education is the most important thing. Period. You can’t learn to start a fire in the rain without taking the time to learn. While many consider their education finished when they leave school, this should never be the case. .Remember when you sat in high school and said; “Now when am I ever gonna use this?” Now you’re a bit older and think; “Man if they only taught me useful things in high schools, like doing my taxes and the difference between a Traditional and Roth Individual Retirement Account (IRA).” Right here, is proof that school didn’t teach you everything, and that you need to keep learning. .Invest in your own education, and the investment will never be wasted. Of course, this doesn’t mean taking on $200k in debt to get a degree in Underwater Basket-weaving. .But there are many ways to continually learn, investing in yourself and your future:
- Free library resources (see my book list below)
- Community/Adult Education Centers
- Local community colleges
- State schools with night classes
- Online teaching websites (Cousera, KhanAcademy, etc)
- Blogs, online content, webinars, etc
I believe firmly in the power of books, and that a library card is the best gift you can give a child. Today’s library card also unlock online resources, eBooks, e-audioBooks, free/discounted museum passes, movies, tax preparation help, knowledge of community resources, and free internet access! Most libraries also have book sharing programs with other local libraries, giving you access to more than your local library’s collection.
Financial Books To Read:
- Rich Dad, Poor Dad by Robert Kiyosaki General introduction to financial literacy, and financial independence.
- Secrets of the Millionaire Mind by T. Harv Eker Study of the mindset that supports wealth vs mindsets that support continual poverty.
- The Millionaire Fastlane by MJ DeMarco Cutting the bullshit on wealth building and laying a blueprint to financial freedom.
- The 4-Hour Work Week by Timothy Ferriss Redefining the concept of retirement, and how to create a dream-line. A timeline for your dreams.
- Good to Great by Jim Collins Defining what it means to be a good employee/company vs a great employee/company. The Hedgehog concept is to find what you can be the best in the world at, what you are passionate about and what best drives your economic engine in a simple concept.
- The Undercover Economist by Tim Hartford This book is a humorous introduction to the world of economics.
- A Whole New Mind by David Pink This book takes a look at the new socio-economic forces of the post information age that have the potential to transform the structure of the developed world’s job market.
# 7 Multiple Income Streams
Protect yourself against the loss of income but having multiple income streams. You could lose your job any day, it’s not protected. Companies these days often have little or no loyalty to their employees, even long-term employees.
Turn a hobby into a side business or invest in a rental property. .Of course, I completely understand that this is much easier for those who already work better-paying jobs. A person who works 2 or 3 jobs or works for low pay, or 80-100+ hours a week, doesn’t have much time left over for hobbies. After an exhausting day, one just wants to eat, take care of other obligations (children, chores, etc) and sleep. It’s hard to make time for hobbies, investing, or creating small businesses. .I completely understand, but those folks living in this situation need to even more. They don’t have the same job security as others and need multiple income streams to ensure a paycheck each week.
This is where education comes in and makes this easier, it opens up options. .Multiple incomes doesn’t necessarily mean multiple jobs. It could also be traditional stock-market investments, gigs off Craigslist, rental properties, blogs, YouTube channels, farmer’s market crafts, babysitting the neighbors, etc. .