Planning for a Family Financial Crisis

by admin on May 1, 2011

If worse comes to worst, your family may be faced with a financial crisis in the wake of the recession. Things are slowly starting to look better, but there is still a long way to go. It is difficult enough handling sudden job loss when you are on your own or with a partner, but when you throw children and loans into the mix, things start getting really hard. Saving money is a good way to be prepared for a crisis of this kind. If you think that you may be laid off, it would be good to set aside a couple of months’ salaries so you are prepared and can stand on your feet before you look for another job.

Another important step is making a budget. If you don’t have a budget, how do you know how much money you have and how much you need? You also have no way of knowing if you are living below or above your means. You might not change your spending behavior if you have a budget, but at least you will know where your money is going. 

It is important to be organized about your expenses. You shouldn’t waste money on finance charges or late fees. Be especially careful about credit card payments – one late payment could really set you back, while several may result in the cancellation of your credit card when you need it the most. You should review your accounts at least twice a month so you do not miss payment deadlines. It would be wise to set up mail checks or e-payments so you get a reminder several days in advance. Make a list if you are having trouble keeping track of everything you owe. Review all your accounts carefully and decide if there are any you could close, and whether the terms on some of the others could be amended in order to become more favorable.

What tools would be most helpful in a crisis? According to experts, these include savings accounts, checking accounts, certificates of deposit, money market accounts, and short-term government investments. Tools like shares, index funds, and other financial instruments of this type could be useful as well, but they entail the risk of fluctuating parallel to market conditions, whereas those of the former group do not. With risky instruments, you do not have the liberty to withdraw your funds whenever you need them. If you do, you will incur tax or early withdrawal penalties. Certificates of deposit are an exception – you lose the interest you have accumulated if you decide to close them in advance of the respective end term.   

Make sure you have maintained cash in liquid accounts for several months before investing in high-risk tools. Exactly how many months depends on your tolerance of risk and your debts. If you are paying tuition for three kids, paying off a second mortgage, and you have lost your job on top of this, maybe it would not be very smart to invest the money you have left in stocks.

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