Financial Balance: Fiscal Fire Drill

In these uncertain times, its essential that we plan for the worst-case scenario. Here's how.

Not long ago, a company I work with informed me that because of sudden and rather drastic budget cuts, I wouldn't be paid -- at all. I panicked. Several thousand dollars were at stake, and I'd been banking on that money to cover some of my family's upcoming expenses. 

First I cursed the company, and then I kicked myself. I'd never had any problems handling life's little financial speed bumps, but this felt like something different. Clearly, in this economy, I needed a strategy for navigating the major detours.

For me, a financial fire drill was in order -- and given the uneasy realities of the moment, I think it's something everyone should do. Just as we install smoke alarms and identify the best way out in case of a fire, it's essential to envision a worst-case money scenario and prepare for it. To keep your fiscal house from going up in smoke, grab a notebook and pen and read on. Preparing a written, detailed plan will help you meet a crisis with calm, no matter what happens.

Examine Your Expenses
Imagine you or your partner losing a job. What bills could you swing on a single income? To find out, make a list of all your expenses, from the monthly payments (cable, mortgage, car loan) to the occasional conveniences (car wash, dry cleaning, manicures). Then figure out what could go, what you could pare down, and what needs to stay. For instance, if that second car payment is eating into your savings, could you survive with just one vehicle and use public transportation?

Here's the catch, though. It's not enough to say "yay" or "nay"; you have to get out there and do some actual legwork. Check out the public bus or train routes in your area to see if downsizing on cars is really doable. If it's not, investigate other possibilities -- test drive a Vespa, give a car-share service a try. Who knows? You may realize that you can easily make cost-cutting changes now instead of waiting for something bad to happen.

Ramp Up Your Savings
Now take a look at your cash stash. How long could you sustain yourself if you fell on hard times? A study last year conducted by Demos, a nonprofit public policy research group, found that 76 percent of middle-income households couldn't survive three months if they had to depend on what they'd stockpiled. So be aggressive. 

Ideally, you should have at least three to six months of living expenses socked away in case of emergency. If you don't meet the mark, start saving today, setting aside 10 to 20 percent of your income each month. (For detailed saving and budgeting tips, visit wholeliving.com/easy-budgeting.) If that seems daunting, just imagine trying to cope without a savings cushion. That's what a fire drill is all about: imagining the possibilities so that you have a solid plan in place -- no matter what happens.

Preselect the Least-Terrible Options
What if you lost your job, your spouse did, too, and then the furnace broke -- in November? By rehearsing how you'd handle a crisis now, you'll be less likely to panic if something bad actually happens. Create a hierarchy of greater and lesser evils: Tapping your 401(k) for cash is worse, for example, than withdrawing contributions from a Roth IRA. (You won't pay taxes or penalties as long as you don't touch the gains.) 

But why borrow from your future? Maybe putting the new furnace on a low-interest credit card for a few months would be your best option. Weigh as many complex personal and financial factors as you can -- and do all the math in advance.

List the Intangibles
As cliched as it sounds, money isn't everything. So finish your drill by acknowledging your support network, jotting down the names of friends and family members you could count on for a pep talk, resume advice, or a shoulder to cry on if the going gets rough. Also think about all the rich experiences in your life that don't cost a dime, from your two-mile morning walk to the library books you read in bed at night. 

Taking stock of what you have will go a long way toward deepening your peace of mind about the future. That way, no matter what happens, you'll always know how to find all the emergency exits -- financial, emotional, and spiritual.

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