Prepare for Emergencies with a ‘Financial Fire Drill’
Put Your Finances to the Test to Discover Whether You’re Ready for the Unexpected
No matter how financially stable you may be, none of us can predict what the future will hold. The COVID-19 pandemic has been an important reminder of this fact because it showed many of us how money difficulties – even a financial emergency – can appear seemingly out of nowhere. To survive any unexpected financial scenarios that come your way, it’s important to have a plan. Once you strategize your financial emergency plan, you can test it by running a “financial fire drill.”
A financial fire drill is something you’ll want to do now rather than later down the road when something happens. Creating a financial emergency plan ahead of time, without the added stress and emotion of an actual event, will be exponentially helpful. The drill will help you clarify your necessary cost of living expenses and how you’ll be able to cover them. If this kind of financial preparedness is important to you, read on to learn how you can run your own financial fire drill.
Go Back to the Basics
Preparing to weather an unexpected financial storm should start with taking a good look at all your monthly expenditures. Create a spreadsheet of all your expenses and slowly delete the ones that aren’t necessary. Your final list should cover basics such as food, mortgage or rent, utilities, and loan and credit card payments. For this exercise, you’ll need to cut out things like monthly subscriptions and dining out – while they can feel like necessities, they are truly just “wants.”.
Now, looking at your culled list, you can work on reducing your monthly cost of living even further. For monthly payments on items like student debt or your mortgage, you have the option of reaching out for loan or mortgage forbearance. Forbearance will allow you to either postpone or reduce your monthly payments, which you would likely need to do in the event of a true financial emergency.
You can also lower your monthly expenses by shopping around for better deals on your essential expenses like phone and internet, which you may be able to bundle together for increased savings. Look to other companies for a competitive price reduction on things like auto insurance, and even work toward saving money on utility costs with these tips.
As you work to lower your monthly spending, make sure you don’t go too far. Canceling things like health or life insurance policies would only serve to multiply your difficulties in certain types of financial emergencies. Remember that your safety net is about more than just savings in the bank.
Discover What You Already Have
Your next step is to determine what funds you will have available to you during an emergency, including cash savings and liquid assets. You may also need to make a plan to increase your available funds. For instance, you may need to look into an alternate source of income, as not everyone is eligible for unemployment insurance in the event of job loss. Here are several possible sources of income during a potential emergency:
- Your Emergency Fund — If you are experiencing a financial emergency, this is precisely the time to use your emergency fund. Ideally, you should have about 3-6 months of expenses saved, but any amount is helpful. If you don’t currently have an emergency fund, now is the time to begin saving!
- A Partner’s Income — Be sure to include your partner’s income in your calculations if you share bills. Sit down with your partner and discuss expectations and make sure you agree on your emergency financial plans.
- A Side Job — Think about the types of side work you could do if needed to help fill in financial gaps during an emergency. Consider whether you have skills or experience that would lend well to consulting in your industry. You can also explore flexible work like becoming a driver, pet sitting, landscaping, or other side work. You can look into sites like Fiverr or TaskRabbit for inspiration.
- Unused Items — If you have clothing you don’t wear, stacks of books you’ll never get to, or furniture sitting in the basement, consider selling them. It is a way to clean your house of clutter and make a little money, too.
Although it may feel extreme to think about taking some of these steps, remember that you may never need to. The important thing when running your financial fire drill is to get all your options down in writing so that you can take whatever steps you need to in the event of a financial emergency.
Tighten Your Current Budget
As you go through this financial fire drill exercise, it just makes sense to update your monthly budget, too. Keep an eye out for expenses — no matter how small — you can do without. Are there services or subscriptions that you aren’t using? Small deductions here and there add up over the course of a year, and small savings do, too! Cutting out even tiny unnecessary expenses results in an even greater buffer during a financial emergency.
Reviewing all your unnecessary spending may also prompt you to consider replacing food and entertainment expenses several times a week. If you buy your lunch three times per week, make a point to meal prep from home and pack once or twice a week instead. You can also do an at-home movie night or go on a hike one day per month instead of spending money on an activity.
As you carve spending out of your budget in the name of your financial fire drill, consider how meaningful it could be to your finances to begin putting that saved money toward your emergency fund or paying down debt. You don’t have to live like you’re in an emergency scenario at all times, but focusing a bit more on saving and debt payments means more financial peace of mind now and in the future.
So, Did You Pass Inspection?
If your answer to this question is no, don’t fret – you aren’t alone. It’s important to note that the point of a financial fire drill isn’t necessarily to see if you pass or fail. The value is in the process itself, as you’ll come face to face with your spending and saving habits and, hopefully, make adjustments that will better serve your financial security. Awareness is key when it comes to your finances, so finding areas where you can do better shouldn’t be considered failures. Instead, look at them as opportunities for improvement.
Keep the work you’ve done in a file and save it somewhere accessible. If tragedy or an emergency strikes, it can be hard to make decisions without emotion getting in the way. Having a financial plan in place will go a long way toward keeping you on your feet during a challenging time.
No one likes to think about losing a job, facing a serious health issue, or any other stressful financial scenario. However, ignoring these very real possibilities won’t solve the problem. By actively taking preemptive steps, you ensure you can move forward without the lingering fear of ‘what if?’ Putting yourself through a financial fire drill is a positive step you are taking for yourself and your financial future, and it will result in both an actionable plan and more peace of mind.
If you’d like professional guidance in developing your overall financial plan, please reach out to us today. At FC Wealth, we are passionate about helping you find confidence in your financial future and the freedom to live a fulfilled life.