In case of emergency: Do a financial fire drill
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Nobody wants to think about losing some or all of their household income — you can’t predict a layoff, illness or sudden emergencies. But you can prepare for it by doing a “financial fire drill.”
The idea is pretty simple: Figure out the absolute baseline amount you need to live, then plan how you’d cover that amount if you or a partner were suddenly unable to work. It’s much smarter to do this now, rather than on the day your supervisor greets you with “clean out your desk,” or your primary care physician calling to say, “We need to talk.”
A financial fire drill is just a few steps to temporarily reduce spending and to come up with creative ways to meet your obligations. Here’s how.
This includes food, shelter, insurance premiums, utilities and other essential payments (like student loans or car payments). Not included are nonessentials like frequent meals out, a high-end phone plan, weekly sporting events or monthly subscription services.
If you have student loan debt, consider loan forbearance in the face of an emergency. Making extra payments against your mortgage? Great idea, but you’d realistically stop doing that during an emergency.
Hunt around for savings among the “essential” expenses. Reshop your home and auto rates and negotiate your utility bills. But don’t skimp on protection. Dropping your car insurance, even if you plan to stop driving during an emergency, can mean serious consequences. Same goes for life insurance, as it protects your household financially if the unexpected happens.
Not everyone is eligible for unemployment. If you do qualify, do research to find out how much your state offers. But don’t rely on the benefit. Here are some other potential sources of money if an emergency occurs:
Your emergency fund. After all, this would count as an emergency. If you don’t have one, start saving now. Here’s a guide.
Your partner’s income. It’s important to discuss money beforehand so you’re on the same page.
Side hustles. This includes walking dogs, driving for Lyft or Uber or babysitting. Need inspiration? Here are eight side hustles that cost nothing to start.
Selling stuff. Make a list of things you could live without, including clothes and furniture. Here’s where to sell your old items, and how to do it safely.
Taking another look at your budget is a great way to identify “spending leaks,” or “things that suck up their money that they don’t normally think about,” said Becky House, spokeswoman for American Financial Solutions.
“The point isn’t to quit spending any money on things they enjoy, but even cutting back to $5 twice a week will save them $1,280,” she said.
Track your own spending on paper or with a budget app. The money that’s getting wasted each month could instead go toward bigger goals, like beefing up your emergency fund or paying down that credit card.
A few more tips to keeping your budget fire-drill ready:
Brainstorm cost-cutting ideas. Replacing two nights out a month with game or movie nights at home, or checking out public transit instead of driving.
Look for utility discounts. Ask if reduced rates are available, and learn what’s needed to apply.
Update your resume. Be ready to jump into a job search. However, you also need to be realistic about your options. High-paying, specialized jobs might be more challenging to find. Check out our guide to finding a job.
Put all this info into a folder, physical or virtual, and file it away under Hope This Never Happens.
Thinking about unemployment or illness is scary. So scary, in fact, that some people convince themselves bad times will never happen to them. Understandable, but also unrealistic. Take a proactive look at your own finances. You may be better off than you feared – and even if you aren’t, assuming control of your financial future is the smart thing to do.
Image: H. Armstrong Roberts
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