Financial Disaster Preparedness
How do you plan for the unexpected, or put another way, how do you know what you don’t know? Disasters like fires, floods, tornadoes and hurricanes always bring plenty of advice about how we should be prepared with insurance, inventories of our belongings, an emergency pack to grab in a hurry and so on. But most of us don’t have any plans for a disaster that is far more likely to happen: Financial disaster.
Few of us can afford to be without our incomes for a long period, but we all should have plans for that possibility. Here are the 5 things you can do to prepare for financial disaster.
1. Survival priorities. Write down your priorities if the worst were to happen and you were permanently unable to work. Chances are your priorities would be your dependents, your health and a safe place to live, not your credit score! Survival and needs take on a whole different aspect when your circumstances alter drastically.
2. Don’t let a positive attitude (or anything else!) make you an ostrich. An ostrich will put its head in the sand to hide its eyes when it is afraid.
It’s always important to think positively, especially in the face of adversity. But positive thinking should not blind us to reality and the need to take action before things get worse.
Avoid these pitfalls:
“Another big job is around the corner, I shouldn’t settle for less”
You could still be waiting for the big job as you become destitute. Just because you take one or more survival jobs doesn’t mean you won’t continue to seek out better possibilities.
“My business will be profitable soon!”
One of the hardest things in the world is to pull the plug on an unprofitable business. Your dreams for the business were big and you have already invested so much time and money.
“We must keep our house no matter what.”
You need safe shelter that is adequate for your basic needs but no particular home is ever a “must” for anyone. Too often savings are put into a home with little or no equity, that will be lost in the long run. Or equity is used up and the home is ultimately lost.
The bottom line is to avoid depleting your savings or retirement accounts due to lack of action you will have to take eventually. Change is scary but drastic situations call for drastic changes!
3. Don’t make non-essentials into “musts.” Hindsight is 20/20. Common regrets voiced by bankruptcy clients include failing to cut expenses to the bone soon enough, pouring money into a home that’s not realistic to keep, and putting “good credit” ahead of long term survival. Believing that things always get better and just working hard will solve the problem leads many people to dig a deeper financial hole.
4. Don’t wait to plan for a financial disaster. Write down survival priorities and look at alternatives now. You will need to re-do your financial survival plan each time your circumstance change (i.e you have another child, your income goes down, you take on a new expense).
Consider how you would respond to the financial challenges posed by various “worst-case” income-loss scenarios such as if you (or a spouse/partner) is out of work for a year or more, becomes permanently disabled, or can only find work that pays 1/3 of current income. Also consider unexpected expense increase possibilities such as if you or one of your dependents needed expensive medical or nursing care not covered by insurance; if you need to relocate but couldn’t sell your home for enough to break even and it takes 10 years for the value to recover; or if your vehicle is totaled and insurance pays you little. In each instance, think about what would be necessary to adjust your finances to survive.
5. Get legal advice early to ascertain options. Bankruptcy should not necessarily be the “last resort” although most people think of it that way. Depending on the circumstances, a bankruptcy can allow a mortgage to be “caught up” over time or prevent the loss of retirement savings and other property. But waiting too long can decrease the options available in bankruptcy, so it’s important to get advice early.
Bankruptcy is not something that anyone would desire unless it was absolutely necessary, but it exists in our Constitution and our laws for a reason; To give honest people in financial distress a “fresh start” so that they can rebuild and avoid poverty. Many people think bankruptcy is only for quitters or deadbeats. But there is biblical reference to debt forgiveness (Deuteronomy 15:1-2) and many famous people have filed bankruptcy and gone on to become very successful. Examples include Milton Hershey (Hershey’s Chocolate), Walt Disney, Henry Ford, Thomas Jefferson and Dave Ramsey to name just a few. Whether you use bankruptcy or not, you owe it to yourself and your family to learn all that you can about your options and the possible consequences of your financial situation.
We must all hope for the best, plan for the worst and accept what comes. Most people can rebuild after a financial disaster and after a bankruptcy. If circumstances make rebuilding impossible, getting legal advice from a respected bankruptcy attorney will help insure your future. Don’t be an ostrich!
(c) Hummingbird Credit Counseling and Education, Inc. 2011. All rights reserved.