By Lynnette Khalfani-Cox, The Money Coach®
As someone who has had her fair share of economic setbacks — including being in debt, going through a costly divorce and being downsized — I know from firsthand experience the importance of having a financial back-up plan.
A good Financial Plan B can help you cope with both anticipated and unexpected calamities that can wreak havoc on your finances. No matter what curveball life throws you, the goal is to get back to normal with as little disruption, expense and stress as possible. That’s why having a Financial Plan B is so critical.
Here are four action steps to take to protect yourself, and your family, with a well thought out financial back-up plan.
Step 1: Consider your risks
The first step in establishing a back-up plan is to consider what potential risks you might face. Obviously, a laundry list of things can go wrong in life. But the purpose of this exercise isn’t to let your mind run wild with fears about all sorts of far-fetched catastrophes.
Instead, the objective is to make a list of common, or even likely, potential threats to your financial wellbeing. You can group them into categories if you like, such as personal, professional, health and legal risks.
Step 2: Make sure you have adequate insurance
The next step is to have enough insurance coverage, to minimize certain risks. Insurance can help build a fortress around yourself and your family. So every year, be sure to review your insurance with your agent or trusted financial advisor that includes:
- Homeowner’s or renter’s insurance – this can cover anything from fire damage to your property to legal expenses if your dog bites someone.
- Health insurance or disability coverage – these provide protection against medical issues, disease, or accidents that may keep you from working.
- Life insurance – this protects your loved ones against the risk of you dying, and is especially useful if you’re the primary breadwinner in your family.
- Car insurance – this protects your vehicle and the valuables inside it from loss, damage or theft.
Step 3: Work on building your savings
Beyond insurance, having a savings nest egg is another way to help build your economic strength and create a viable financial back-up plan. Saving what money you can, little by little, is another effective strategy to deal with life’s setbacks and emergencies.
Step 4: Practice living under a “worst case” scenario
You should also do a “stress test” once a year in order to fortify your financial health. Case in point: assume you are in a relationship, and one of the risks you’ve identified is job loss for yourself or your partner. A really helpful exercise for the two of you would be a “worst case” stress test where you try to live on just one salary for a month or two, to see how it impacts your lifestyle and your overall finances. If you find that it’s impossible to live on a single income, or nearly so, then you should adjust some things in your budget now, so that in the event of an actual downsizing, the two of you would not be totally thrown off by getting that pink slip. Ultimately, the whole point of creating a back-up plan is to get as prepared as humanly possible for the day when something goes wrong.
We all know that life isn’t perfect. There will be natural disasters like earthquakes or fires. There will be career setbacks and challenges. And there will be personal, financial or legal pitfalls. How well you recover from any challenging situation often depends on what you did in advance to prepare.
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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or GreenPath Financial Wellness counselor who can help tailor a solution for you.
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