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In Case of Emergency, Cut Here
by, 08-11-2009 at 07:56 PM (3741 Views)
We all know that we should plan for an emergency. From an early age, weíre taught to have an evacuation plan in case of fire and how to call 911 if we need help. If you live in hurricane, tornado, wildfire, or snowstorm country, youíre taught to keep a kit handy with the supplies youíll need to survive until things return to normal. But how many of us give any advance thought to preparing for a financial emergency? What would happen if you lost your job tomorrow, or the main earner in your family suddenly died? Do you know what you would do to stay afloat until things returned to normal?
Many of us carry insurance to protect us from the big disasters in life such as a house fire, a health crisis, an unexpected death, or long term disability. However, insurance takes time to pay up and it doesnít protect you from job loss, strikes, pay cuts, or other disruptions to your income stream. Maybe you keep an emergency fund to help out during such events, and thatís admirable and advisable. But in an emergency, you wonít know how long that money will have to last and youíll need to make it stretch it as far as possible. This is where having a financial emergency plan comes in handy.
My friends call me paranoid because I keep a list of things I would cut from my budget in the event of a financial emergency. The list is ordered according to which cuts would generate the most cash in the shortest period of time. My list also includes the assets I would liquidate, and in what order, if the emergency dragged on for a prolonged period of time. I revisit my list once a year to see if there are things I need to add or reorder. I donít think Iím paranoid, just prepared. I donít want to be caught without a plan if or when one of us is suddenly laid off, has an accident, or unexpectedly dies.
So what does a financial emergency list look like? Everyoneís list will be different based on what you have in your life that is superfluous and what assets you have that you can liquidate. However, Iíve listed some categories and ideas, taken from my list, that you might want to consider for your own financial emergency plan.
The first category of things to cut includes anything not necessary for daily life or work purposes. Cutting these items reduces your spending quickly and (usually) dramatically. Items include cable TV, cell phone extras, satellite radio, gym memberships, subscriptions to
websites, movie rentals, going to movies, clubs, and bars, high speed Internet access (dial-up is cheaper), magazine subscriptions and book clubs, maid service, music downloads, eating out (including the morning coffee run), gift giving, hobby and craft supplies, vacations, clothes that are not strictly necessary, and any shopping done for ďfun.Ē
When times are good, most of us spend on a wide variety of things that are unnecessary. Look at your own spending habits to identify which items you could cut quickly and that would generate quick cash. Be ruthless and prepare to act fast. Remember that when an emergency
strikes, acting fast could save you big money. Dithering over your satellite TV for four months, for example, could cost you $400 if you currently pay $100 a month. Thatís $400 that you wonít be able to get back if you need it later.
If youíve cut all unnecessary spending and the emergency is dragging on or you are still unable to make ends meet, itís time to begin cutting from the second category on your list. These are things that are still unnecessary, but which cause more pain or inconvenience if you have to cut them. Examples include eliminating the monitoring to your home alarm system (the alarm will still work, but youíll be saving the monthly monitoring fee), cutting out the cell phone
entirely (or the landline), dropping Internet access entirely, eliminating lessons or sports for the kids, or pulling kids out of private schools. Consider temporarily dropping or eliminating your
contributions to IRAís or 401Kís. Cut your debt payments by selling or returning any items on which you are making payments or leasing. Freeing yourself of payments will free up a lot of money. This includes ďnecessaryĒ items like cars. You can sell the ďniceĒ car, pay off the note, and buy an old beater to drive while you get through the crisis.
The decisions in the second category are tougher to make than those in the first and will likely result in grumbling or revolt in the ranks. However, if things are bad enough, youíll find that cutting from this category is preferable to doing without heat or food.
If youíve cut every unnecessary expense, no matter how painful, and youíre still in emergency mode, itís time to start liquidating. This should be the third category on your list. You might want to keep a separate list of things that would make good yard-sale, e-Bay, or
consignment merchandise. If you have to, you can quickly move through your house gathering up items to sell. Also put on your list larger items you can sell. If you have paid-for ďtoys,Ē such as extra cars, a boat, jet-ski, camper, vacation home, or time-share membership, know what theyíre worth and have a plan for selling them (if youíre still making payments, these items are cut in category two to eliminate payments).
Do you have investments, CDís, stocks, bonds, savings bonds, IRAís, 401Kís, life insurance, or other accounts that can be liquidated for cash? Know in advance which financial instruments you can cash in and the penalties and procedures for doing so. Order your list so that you cash in those with the smallest penalties first. I donít recommend cashing in retirement products unless you have to because the tax burden is so heavy and youíre putting your future at risk, but if the worst comes, know how to liquidate your 401K or IRA.
The final thing on your list will be your house, if you own one. Everything youíve done up to now has been in an effort to keep the house. However, if everything else fails, this is the last resort. Yes, you could take out an equity loan and try to keep yourself afloat a bit longer, but if you cannot pay that loan back (and if things are this bad, realistically you probably canít), they will foreclose on your house, leaving you with ruined credit and little chance of getting another home in the future. Far better to sell it on your terms. On your emergency list, keep an estimate of your homeís sale value (not the tax value, but what you could realistically sell it for), and the name of your preferred real estate agent. Know your market, as well. If homes take a long time to sell in your area, you may need to put it on the market well before your funds are depleted. If homes are selling fast, you may be able to wait a bit longer.
I do keep one other item on my list, and that is the name and phone number of my mortgage lender. This is so that when an emergency strikes, I can call them and immediately begin working with them to temporarily defer or lower my payments. Lenders are much more receptive to working with you when you call them early in the process and are honest about your situation, rather than skipping payments and ducking their phone calls. Most will probably help you as much as they can to get you through the crisis, but you have to make that phone call.
As with any other emergency plan, itís best to think about your financial emergency list before you need it. It is much easier to think and plan when times are good and your head is clear. If you try to make decisions in the midst of an emergency, youíre apt to find that you canít concentrate and so you pick the solutions that are easiest, not wisest. Or, worse, you are paralyzed by fear and denial. I know too many people who, at the first signs of trouble, denied that there was a problem. They went on believing that everything would be OK and refused to cut their spending. Some cashed out their equity or financed their lifestyle on credit cards. By the time they acknowledged the problem, they were so far in the hole that cutting
spending didnít really help and the repossession and foreclosure proceedings began. Donít let that happen to you. Plan ahead and be prepared to act at the first sign of an emergency.
Make your financial emergency list and put it in a safe place. I hope you never need it, but if the worst happens, youíll be prepared.
-Author: J. Derrick