Posted by Dave on August 9, 2011
Have you ever noticed that people who have no financial plan tend to be surprised when disaster hits? For example, their two-vehicle household has two vehicles break down on the same day, at the same time their air conditioner breaks down. Now admittedly, this is just terrible luck, but it’s weeks/months like these that put people into a debt-spiral that takes some time and dedication to get out of.
In contrast, I assume that at some point all of this stuff will happen to me, and possibly all at the same time. This may be seen as a very pessimistic way of looking at the world, but realistically my main goal is to ensure that I do not experience a financial “hit” that puts me into poor financial shape. Beyond putting the brakes on my goal of early retirement or financial independence, such an event would be very stressful for my wife and I (or anyone) to take on, which for the most part with adequate planning can be totally avoided.
Here are some techniques my wife and I employ for avoiding financial disaster:
1) We keep our monthly expenses low: In doing so, such things as prolonged unemployment or disability (to a certain extent) can be mitigated as our expenses are set up so that the low-earner can cover our total monthly expenses.
2) We have a decent-sized amount of savings: Since we cleaned out entire savings account buying a car in March, this has been our number one goal. Having no savings means that something as small as a car repair would cause us to utilize debt, which we would like to avoid at all costs. Our end goal for savings is to have an entire year’s worth of “fixed” expenses (around $10,000).
The reason for this is two-fold – the first being insurance against unknown expenses, the second is if we don’t really feel like working at our current job / career, there is a buffer we have built into our finances to allow for a job-search or lower wages if the new job doesn’t pay as much.
3) We have a bunch of insurance: Car insurance, life insurance, CAA for automobile breakdowns, as well as health insurance through my workplace which provide a cushion for expenses that if we incurred them at 100% would put significant strain on our finances. I don’t really like to pay for the insurance, but the peace of mind it provides is worth it when I examine what would happen if I didn’t have it in place.
I don’t really think there are many financial disasters that can’t be planned for, I just don’t think many people think about the downside or have the same pessimistic viewpoint as myself or others with a robust financial plan.
How do you plan against financial disaster? Do you think you have a negative viewpoint in thinking up a financial plan?