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…Statistically, most families are not prepared for a recession…[but] planning for personal financial deviations lowers anxiety, helps to reduce marital issues, and allows you to help others in their time of need. Here are our steps to glide through your next crisis…
1. Create a household budget; know what you can cut out quickly
There are some bills that you have to pay like your mortgage, car note, student loans, credit card minimums, and utilities. After that, most of what you have to pay is discretionary. Create a budget that covers the essentials plus food, gas, and other items that you deem necessary. Draw a line, and then add the other items that work in your budget now, but could be dropped off in times of crisis.
2. Eliminate Debt
Imagine that…the only required payments were your mortgage and utilities – no car note, credit card bill, student loan or any other payment. Imagine what that free cash flow could do for you! All these debt items cost you thousands in interest every year.
- A credit card balance of $5,000 charging 18% in interest would cost you an additional $2,348 in interest if you only make the minimum payments.
- Anything you purchased cost you 18% more. You are making your financial institutions wealthy instead of building wealth for yourself, plus these items are above the line in our crisis budget. This means that if you can make these payments go away, your crisis budget gets smaller.
There are two popular ways to eliminate debt.
- One method is to create an avalanche payoff plan.
- List out your debts, except for your mortgage, by highest interest rate to lowest interest rate, and apply…[any extra money towards the debt with the highest interest rate.
- When it is paid off take the savings in interest realized by doing so and apply it plus the initial extra money to the debt with the next highest interest rate
- and] keep repeating until your debts are eliminated.
- Sometimes it may be better to do the snowball method where you
- order your debts in order of the smallest balance instead of the highest interest rate.
- The idea is that you get more motivated by getting some quick wins early in the process…
Debt can…prevent you from saving for retirement, and greatly increase your required cash outflow. In the good times, eliminate debt…
3. Build Emergency Savings
In times of crisis, cash is king….
- Accumulate six months of no-job income. In good times try to add to this in order to pay cash for life events, like a roof, HVAC, car repairs, etc. At a minimum though, the balance should stay above the six months of crisis income mark.
- Keep your emergency savings in an FDIC insured account or CD. Your emergency savings should not be invested in a product that could potentially fall in value when you need it the most [i.e. the stock market].
4. Protect your portfolio
Think of your retirement portfolio as your castle on a hill. You want to protect your investment for your future self, so selling portfolio assets to pay bills is… [not something you should do.]
- …Cashing in a retirement account before 59½ can be costly.
- You could be taxed at your regular state and federal rate plus a 10% early withdrawal penalty. For many this could add up to be 41% of the gross withdrawal amount. It’s better to think of your retirement funds as off-limits.
- Should things get really bad, your retirement accounts are protected in bankruptcy.
- The best way to have a portfolio protected is through financial planning.
- Understanding your risk tolerance,
- building a diversified portfolio,
- keeping costs low
- and focusing the portfolio on the long-term are all a part of investment success.
- A fiduciary, fee-only advisor can help you build out this plan to be ready for your next crisis.
5. Keep your resume updated
Job changes can happen quickly. Having your resume ready to hand out will reduce your anxiety and help you understand the best direction for your career. This process can be painful at first, but if you look over your resume a few times a year, it gets easier to update. Google “free resume builder,” and you will find endless options to assist you.
…Dave Ramsey…says, “live like nobody else today, so you can live like nobody else tomorrow.” You may not see your friends recession proofing their households, but it is certainly something that the masses should be doing.
Editor’s Note: The original article by Casey T. Smith has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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