As an advisor, I stress the importance of a well-thought-out, long-term plan to keep financial goals and objectives “on track,” especially during times of personal financial crisis.
Even the best-laid plans can and likely will evolve in the face of unforeseen setbacks or unforeseen obstacles. Experiencing loss, whether it’s the loss of a job, the loss of a spouse or partner, or an unexpected, significant financial loss (say, a medical bill or a lawsuit) is undeniably difficult to navigate, but that doesn’t mean dreams, hopes, or goals are. derailed.
The more prepared a financial plan is for common scenarios, the better its financial future will be through these challenges. Below are some preparation steps to ease financial worries during an otherwise difficult season of life.
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1. Assess your budget and rank your critical spending needs.
The ability to quickly access liquid assets will be fundamental if an individual or family faces a setback. I recommend that individuals have six to 12 months of cash reserves held in an emergency fund. In the event of a job loss, for example, consider how well this account is funded and estimate the time periods for which the funds will provide.
Research (opens in new tab) shows that, on average, a person can drop out of the labor force after an unexpected loss of one to four months, meaning that a quick turnaround to reassess the short-term budget is important.
Mission critical is keeping up with expenses like the mortgage, groceries, utility bills, and continuing to pay off credit card or student loan debt. Often overlooked, it is extremely important to weigh your health benefit needs and look at alternative insurance plans. Don’t let it get in the way. if an unexpected medical problem occurs while an individual does not have coverage, it can dramatically derail the short-term financial recovery someone was in while they were looking for another job.
From a preparedness perspective, evaluate discretionary spending to see what can be cut to free up more funds for short-term needs. This might look like cutting back on hobbies, clothing, or dining out. While these may be difficult in the short term, take comfort in knowing that they will be temporary tactics to keep track of your long-term aspirations.
2. Have easy access to all money accounts.
This sounds easy, but sometimes only one of the couple knows the true extent of their financial picture. To proactively alleviate stress on the partner, both parties must be fully aware of all revenue streams, cash flow projections, bill management and where? this cash life or accounts are kept.
In the event that a spouse or partner passes on, having full asset accountability, access to account passwords, and knowing where each asset lives will make transferring funds and transitioning plans much easier.
3. Locate and click on Alternative Funds or Action Plans, if necessary.
Stable emergency account funding for use in the event of financial loss may not be available to everyone, but that doesn’t mean preparedness can get in the way. In some circumstances, evaluate which alternative accounts can be withdrawn to bridge the short-term cash gap. Between available liquid assets and an understanding of monthly expenses, calculate how much you might need to fill the financial gap.
Alternative financing solutions can look like selling investments, taking out a home equity line of credit, or perhaps taking out a personal loan. Of course, understand that these are probably the last option, given the myriad of possible penalties, taxes or interest.
Also be prepared to be your own advocate when/if you face a difficult financial situation; if the individual faces job loss, ask for severance or protect more money or longer health insurance. If the individual receives a large unexpected medical bill, negotiate interest rates and ask about payment options within a year. These deals are often much more flexible than individuals expect.
4. Lean on a financial advisor.
In terms of preparedness, a financial advisor’s job is to provide good guidance before, during, and after any type of financial setback. Align with a trusted professional who can develop a financial plan that can weather the financial storm. Using a financial advisor’s guidance in a setback doing happening can provide confidence, advice and direction to get back on track financially as quickly as possible during what can be a highly emotional time.
No one wants to face financial loss or failure, so planning a series of activities can keep individuals, couples, and families on their financial footing when and if an obstacle occurs.
This article was written by and represents the views of our contributing advisor, not Kiplinger’s editors. You can check the adviser’s records with the SEC (opens in new tab) or with FINRA (opens in new tab).