Risk is an unavoidable part of life. What comes to mind when you think about financial risk? Investing in the stock market? Overpaying for something? Losing your job? Being broke at retirement?
In this post series I’ll discuss the ways you may be risking your money. Being aware of these will help you make smarter choices when managing your money.
Here is Part One – Inflation Risk
Part Two – Risk of Needing Money Suddenly
There are many reasons that you might suddenly need more money (or have less income). Some of the common ones include:
- Job loss or decrease in hours from:
- being fired
- being laid off
- disability or illness
- family needs
- emergency repairs of house or car
- pet medical bills
- funeral and other expenses if a family member dies
You can never predict exactly what is going to happen in life but there are ways to be more prepared for the unexpected.
Here are some methods to prepare for the unexpected:
Spend less than you earn
The simplest and probably most obvious method is to have wiggle-room in your budget.
In this post I discuss ways to reduce your spending. When your intention is to spend less than you earn you have to do something with that extra money. Some people like to transfer money directly into savings after each pay day. Or you can challenge yourself to see how much you have can left at the end of the month, and try to keep improving this.
In Manitoba there are many credit unions that offer high interest savings accounts. Start with putting money away into one of them. In another post I’ll write about how much you should have in your emergency funds.
Insurance is for the unexpected
Consider your insurance needs and whether you are eligible for government sponsored disability programs or not. Every program such as CPP, EI, and Worker’s Compensation has different qualifications, as well as levels and lengths of compensation in the event of injury or disability. Often a personal disability insurance policy is a worthwhile investment. This will take some of the risk of job loss away.
Life insurance can also be used to provide additional money in the event of a family member’s death. This is a big topic so I’ll write more about it another time.
Credit can provide short term help
If you don’t have problems with misusing credit you can consider a credit card or line of credit as a temporary source of funding. Just make sure that you can pay it off within a month or two. This is a good reason to not overuse credit cards. If they are already maxed they won’t help you in a true emergency.
Have a plan for reduction of expenses
Before you actually need to do this, think about how you could live less expensively. Could you move in with a relative? Sell your house or car? Stop eating at restaurants or making other fun purchases? In a crisis many people want to maintain the status quo – for themselves or their children or to “keep up appearances” for their peers. However it’s best to reduce your spending immediately if there’s a possible money crisis afoot. You can always start spending more again once the situation is resolved. But you don’t want to dig yourself a debt hole by spending money that you don’t have.
Include the unexpected in your budget
No one can predict every situation, but depending on your lifestyle and how many assets you own, and dependents you have, you can estimate how likely unexpected expenses are to come up.
For example, if you have a car perhaps you can plan for $100 a month in unexpected expenses. Often the age of the vehicle will affect this. If it’s under 5 years $50 might be enough, but if it’s 10 years or more you may want to start saving $200 a month for repairs or eventual replacement.
Each house you own can add additional expenses. You can prepare ahead of time to replace your roof and appliances. And of course children, other family members, and pets may lead to sudden money needs.
So a person who rents an apartment, has no children, no car, and 1 cat doesn’t need to set as much aside as someone with 2 cars, 3 kids, a big house, a cabin, and two Labrador retrievers. A targeted savings account is useful here. Pick a monthly amount to deposit so that you have money on hand for the expenses that you know will pop up in the future.
Discuss possible problems with your family members ahead of time
If you have other people possibly tied to you financially, whether that’s a romantic partner, children, siblings or parents, it’s important to discuss scenarios ahead of time. Doing all the above items yourself isn’t very useful if your partner isn’t onboard with this.
With your household members discuss your bare-minimum spending requirements, and the best ways to prepare for job loss or expensive bills. The worst time to have a calm discussion with your significant other is in the middle of an emotional crisis. Often a crisis can also affect one party more than the other. Let’s say you normally manage the finances. If your mother passes away you may be emotionally distraught and not in a good place to be making decisions. If you discuss this with your partner ahead of time he or she is in a better position to step in, manage the money, and deal with the crisis in whatever manner you previously agreed upon.
Write down your plan
Similar to the above scenario, writing down your plans will help you remember them and may add a level of accountability. Have a family meeting where everyone provides their input and document the results. Share the written plan with everyone involved so that you can refer back to it when required.