Preparing an Emergency Financial Plan

January 18, 2009 by  
Filed under Financial Planning

Two years ago when the risk of avian flu was front and center in the media, I became very concerned about a pandemic and its effects on my family’s lives.  Many people wrote it off as too remote to worry about but I didn’t.  Instead, I spent several weeks devising an emergency bird flu plan, including acquiring food, medical supplies, back-up generator, communications, you name it.  Those preparations are still in place.

As do many others, I also have disability insurance and long term care insurance to protect Mrs. ToughMoneyLove and me in case of a health care emergency.   Similarly, we also have wills, health card directives, durable powers of attorney, etc. in place for even more desperate times.

Losing a job is a financial emergency that, in our economy, is far more likely to occur than a bird flu pandemic.  I have thought about what might happen if I lost my job and how I would respond.  Yet, I have not spent anywhere near the time and effort putting together an emergency financial plan to help prepare us for such an economic disaster.

For most people, their emergency financial plan is having an emergency fund that, using a well publicized rule of thumb, has 3-6 months of living expenses.  Fortunately, we have that and more.  However, not everyone has such a fund.  Moreover, I am very concerned that in our present economy, 3-6 months may not be enough.  This is particularly the case for older workers who already face age-based difficulties in finding new employment.  In too many instances, a “displaced” or “downsized” baby boomer becomes someone who is involuntarily retired.

Even if you have an emergency fund, I think you still want and need to have a plan in place that allows you to immediately and significantly decrease your household net burn rate.  By decreasing your “net household burn rate” I mean adding income and cutting expenses in such a way that it reduces your dependency on your emergency fund. 

In my thinking, the first thing you do when you lose your job is to feel sorry for your itself and perhaps drown your sorrows a little bit.  Two hours later, you activate your emergency financial plan.   If you wait until the bad news hits to actually create the plan, you can lose precious days and dollars in the delay.  On top of that, because you will be operating in panic mode without a plan, you are more inclined to overlook something important that you can and should do to reduce your household burn rate.  Now is a better time to do it, when you are able to think without emotion.

As I see it, the process of devising an emergency financial plan for sudden job loss would include at least five critical components:

1. Identifying and protecting existing financial resources that could be used in sustaining a minimalist lifestyle while you are unemployed.  An emergency fund would be one example.

2.  Identifying potential sources of alternative income that could be activated during a job loss emergency.  Unemployment insurance would be right at the top of the list.  Temporary employment opportunities should also be considered.

3.  Identifying household expenditures that can be cut or reduced immediately.  Much has been written about this by many others, including expert frugalists of which I am not.  The obvious candidates here would include discretionary cost categories such as cable, phone, internet, etc.  I’m sure there are many others.

4.  Identifying expenditures that can be deferred or delayed during a financial emergency.  I’m guessing that not everyone gives this a lot of thought.  What I am thinking about in this step is finding programs or strategies that would allow you to temporarily suspend or extend out certain expense categories.  One example would be life insurance premiums, where you could arrange to have your premiums paid from cash value (if you have any), etc.  Other examples would be finding programs that local utilities (and perhaps even businesses to whom you owe money) have that would allow a customer in a financial crisis to reduce and extend monthly payments during a period of unemployment.  There probably are (or will be) more of these plans around than we realize. 

5.  Assembling, recording, and organizing all information needed to rapidly implement your emergency financial plan.  It does not help much if you go through steps 1-4 but fail to make an organized record of everything that you learn.  When a financial emergency (i.e., job loss) hits, you want to activate your plan immediately.  Time is of the essence to reduce your burn rate.  This requires having easy access to information such as: (a) how to apply for unemployment insurance benefits; (b) how to cancel discretionary expenses you have identified; and (c) how to apply for the various expense deferral programs.

You may think I am being obsessive about having an emergency financial plan.  Some of you are probably recalling the Y2K non-event as an example of preparations gone mad.  Maybe so, but with everything that has happened in our country since Y2K, being prepared for almost anything should be high up on everyone’s list. 

So I am going to prepare our emergency financial plan and will probably write about it in a future post.  Do any of you have ideas in this area?

Image credit:  Rodolfo Clix

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6 Responses to “Preparing an Emergency Financial Plan”
  1. kitty says:

    ” Moreover, I am very concerned that in our present economy, 3-6 months may not be enough.”

    I don’t think this is ever enough, and certainly not in present economy. Many software engineers and programmers who lost their jobs after the internet bubble burst took over a year, sometimes 2 years to find a new job. Some jobs – those for application programmers hired to deal with Y2K – never came back.

    Also, when people think about “emergency fund” they think about losing a job. But what about a medical emergency? Medical expenses can easily run in 5 digits in just out-of-pocket expenses. In some cases they may even be in 6 digits – if the insurance refuses to pay for something. To me this is a far greater concern than just a job loss, but then I can live for a long time on my savings. Not to mention that given the history of past layoffs in my company, I am likely to have a severance equal to 6 months of my salary.

    Personally, I don’t designate a part of my savings as an “emergency fund”. What I do have is savings in cash and CDs. All of my cash/CD savings can be used in an emergency. Even my investments can be cashed out if needed, although I’d hate to sell at current prices. I don’t see a need for a detailed plan of which expenses to cut either – if it becomes necessary any expense other than food, roof over one’s head and heat is a fair game. How much time does one really need to sit down, look at the expenses and decide what to cut first?

  2. MasterPo says:

    After 9/11 I was one of the thousands of IT people in NYC out of work. I ran out of my usual 6 months of UEI and was only 3 weeks from the end of the 3 month extension. I finally took a crappy “life boat” job. At least it paid more than min wage at Starbucks. But in that case, if I had held out for an IT job I probably would have been out of work for well over year.

    Therefore I agree. In this economy there is no such thing as enough of an emergency fund. I’d rather have some good bond funds (preferably munis) to generate a cash flow.

  3. kitty says:

    #MasterPo: “I’d rather have some good bond funds (preferably munis) to generate a cash flow.”
    Personally, I much prefer individual bonds to bond funds, at least outside of 401K. With individual bonds, you have a “promise” to get the face value of the bond back at maturity. So even if the value of the bond falls between now and maturity, you can sit back, collect interest, and wait until the maturity date. With bond funds you have no maturity date, no promise to get back your original investment, and the value of individual bonds in the funds can drop. When the interest rates start going up – and they certainly cannot go down any more – the value of all bonds will drop. Maybe now the bond values are still a bit lower than what one expects for these interest rates and the yields are higher, so the values can still go up. But eventually the interest rates will start going up, and the value of all bonds will drop.

  4. MasterPo: Having an alternative income stream is an excellent emergency fund but that is hard to achieve for most people. It is also a potential excessive tax liability.

    Kitty: I agree that holding invividual bonds is smarter if you are planning to hold until maturity and are satisfied with the yield based on your purchase price and interest rate.

  5. MasterPo says:

    Kitty – I only mentioned bund funds because it’s simple. Most people can’t manage to pick individual bonds, don’t have the money to buy individual bonds, and can’t manage a ladder of maturities. But if you can do all that go for it.

    TML – That’s why I specifically mentioned munis.

  6. Nancy says:

    I’m WAY more concerned about a financial meltdown than the avian flu. That seemed rather blown out of proportion…

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