Many families in the US are going through difficult times lately mainly because of the effects of the revaluation of real estate. Every day I hear about people being negatively impacted by the current downturn. I feel that with additional preparation, the struggling families would weather this storm better. I have already said that teaching finance, discipline and especially financial discipline should be a priority for our school system but that’s not going to happen overnight. In the meantime, here are my tips on preparing for a financial storm. You should get ready for a financial storm now even if it may seem like you’re barely coping with the current one.
Savings. In addition to your retirement savings and all other savings, make sure you set aside serious funds into a rainy day savings account. This account must increase with EVERY dollar you receive. This is a tax that you must pay to yourself and your family. If you have a family, the account balance should be enough to sustain your family for at least one year without earnings. If you do not have such an account, next time and every time you get ready to pay for anything, consider instead depositing the funds into the savings account. Never purchase new cars, houses, or anything else if you have not saved into this account the required sum. If you do not pay your family into a rainy day account, you’re likely to run into financial troubles some day. Never fund purchases out of this account unless your family is in a serious hardship and you see no other alternative. Replenish immediately after the situation improves.
Insurance. Never consider debt as your “insurance” for the difficult days. Just because you have equity in your home, it does not mean you’ll have access to these funds when you need them most. Just because you have a credit card with a high credit limit, it does not mean that you should use it or rely on it during financial hardships. Do not borrow against your retirement account just because that option may be available to you. Even bank accounts are not good enough in some cases (bank runs, lack of confidence in banking system). Cash on hand isn’t even good enough in some situations (hyper-inflation). Do you think your lines of credit will protect your family? Get enough insurance for your house, car, and other valuables to protect your family against disasters. Do not buy into income protection and other similar schemes because they are simply ways for others to build their savings accounts.
Debt. Get rid of your short-term debt. People who care about you do not care what car you drive or where your house is if your credit cards are choking your family every month. If you owe large sums on your credit cards or in other short-term loans but drive a new car, get rid of your new car, you cannot afford it. You have student loans, pay them off. I have heard most arguments in favor of one type of short-term debt vs. another. They are all bad! Pay them all off just as soon as possible.
Credit. Treat your credit score and credit rating very seriously as that not only matters when you ask for a loan but also in many other situations such as getting a job and renting a home. Low credit score means lack of discipline. Cancel your TV service, get rid of your cell phone, take public transportation, buy only basic ingredients for your meals, do not eat out until you pay off your creditors and improve your credit score. There are all kinds of complex ideas on how to increase your credit score. If you care about them, you are wasting your time. Live your life responsibly and you will not have to worry about this. That’s the fundamental fix.
People. If you care about your extended family, friends, your community and your country, start yourself a program of financial discipline if you don’t already have one. Get books from a library, take classes on this subject and discipline yourself and your family into financial stability. When you get into financial trouble, people around you are also affected very much. Your family, the state or the country may need to help you. If the whole country had acted in a responsible manner in the recent history, we would probably have avoided the current difficulties.
A lot of strong statements have been made above. Obviously, I fully understand the unique situations that people have. You know your situation best. I hope you realize that you have the ability to change that situation when it comes to your finances. It just requires your focus and attention.