Brace yourself for financial crisis
- By Milt x_Zall
- Nov 09, 2000
With a booming economy and expectations that the stock market will continue
to perform well, many people may feel little need to plan for a financial
emergency. But good markets don't last forever, and even in a booming economy,
you or your spouse can lose a job. It happens.
A survey conducted this year by a major survey firm found that 55 percent
of Americans have no plans in place to deal with a personal financial emergency.
A devastating financial emergency can strike at any age or income level,
but those older than 65 and between ages 18 and 34 are particularly at risk,
according to the survey.
Potential financial emergencies include the loss of a job or business,
legal troubles, a serious illness or long-term disability, a divorce, a
natural disaster such as a fire or hurricane, or the sudden need to care
for an aging parent. Even something as small as a major car repair can tip
a family over the financial edge.
Here are some recommendations for preparing for the unexpected, from
Dennis Filangeri, a certified financial planner based in San Diego, Calif.:
Examine your household finances to see what you actually would be able
to do if something happened, such as a loss of income or large unexpected
expenses. How quickly could another family member find work? Do you have
easily accessible, penalty-free savings to tide you over? How about loan
sources such as home equity or a personal line of credit? Many families
simply choose to ignore even thinking about something going wrong — until
Plan an emergency budget.
Establishing a regular budget or spending plan is a good idea for any
family. But you also might want to develop an emergency budget, based on
the minimum amount of income and expenses you would need to survive in the
event of a financial crisis. This means a bare-bones budget, covering such
things as mortgage or rent payments, transportation, clothing, food and
Obtain adequate insurance.
One of the front-line defenses against financial catastrophe is insurance.
Most people have life insurance, a homeowner's policy and auto insurance.
However, homeowners often don't have extra liability insurance, and renters
frequently overlook renter's insurance, which covers the loss of personal
property. Millions of people are not covered by medical insurance, even
when it's available and affordable. And most workers are not covered by
adequate amounts of disability insurance, which replaces a portion of income
lost because of a disabling injury or illness. Even fewer buy long-term
care insurance, either for themselves or their parents, despite the fact
that a nursing home stay can quickly deplete a family's savings.
Set up an emergency fund.
There is much debate, even among financial planners, about how large
an emergency fund you should have and where you should keep the money. Some
say you should have at least three months, six months, even a year's worth
of expenses reserved in a savings or money market account. Others don't
like to see too much tied up in low-yielding accounts.
To a large extent, the size of your emergency fund depends on your financial
circumstances. For example, if both spouses work in stable jobs with different
employers, the loss of a job by one of the spouses will have less impact
than if the family relies on a sole breadwinner. Having adequate insurance
and healthy investments lessens the pressure for a large emergency fund.
One piece of advice: Try not to rely on retirement accounts for emergencies
because of the tax bite (unless you take out your Roth IRA contributions)
and loss of tax-favored growth from withdrawals.
Consider loan sources.
Careful planning should reduce the need to borrow for an emergency.
But if you must borrow, keep the following points in mind. Establish a line
of credit in advance of financial problems. Once you lose a job, for example,
it's tough to get the line of credit. Consider using a home equity line
of credit, which is tax deductible, or a personal line of credit (a business
line of credit is tax deductible). Try to avoid borrowing from your Thrift
Savings Plan or life insurance cash values. Failure to repay could result
in a big tax bite. Also avoid credit card and payday loans — they're very
Zall, Bureaucratus columnist and a retired federal employee, is a freelance
writer based in Silver Spring, Md. He specializes in taxes, investing, business
and government workplace issues. He is a certified internal auditor and
a registered investment adviser. He can be reached at firstname.lastname@example.org.