Preparing an Emergency Financial Plan
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.
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