Friday, November 13, 2009

By 

James W. Stone

Are you concerned about what you would do if you, or someone in your household, lost their job or got seriously ill? As we all know, these things do happen. And when they happen, it is traumatic emotionally as well as financially.

Why not plan for this type of thing to happen? I know it's not a happy thought, but it's also not a happy thought to be in a burning building, or on a sinking ship. In school you went through fire drills on a regular basis. If you ever took a cruise, one of the first things you were required to do was to practice the "muster" for abandoning ship. In these situations you might have "done the drill" because you had to do it. But there were important lessons learned in the process.

The lessons learned in an emergency drill are simple things like how to move quickly together with other people, or how to put on a life vest. You might learn about stairways you would not encounter if you usually take the elevator, or the nearest exit routes, etc. During the drill, you learn where the doors are, you learn where the life preservers are, and you learn what station you should report to for a life boat. You might think about what it would feel like if this were the real thing. The idea is, if you ever need to "do the drill" for real, you will be able to react quickly, habitually, and without getting in someone else's way. The drill helps improve your chances for survival if an emergency happened and you needed to act without time to think.

Is a financial disaster much different than a building on fire, or a sinking ship? Yes! It's hard to ignore a fire. And when the boat starts to lean to one side, you will feel certain panic. But a financial disaster might take a few weeks to get your attention.

Consider the employee who is terminated in a corporate restructuring. This employee might get a severance package that covers several months of salary. It wouldn't make sense to use that severance package to buy a new car or new furniture. But that is exactly what some people do with the money. A less obvious but equally disastrous course of action is to continue to live their financial lifestyle as if nothing happened -- thinking they will have a new job by time the money runs out. Then they learn how difficult it is to find another job. It would really be nice to have that money six months later.

Or, consider the sudden illness of a family member. Perhaps there is enough money in the budget to handle a spouse who can't work for a month. You think everything will be okay until they get back to work. On the other hand, it could turn into a bigger problem when you realize you are spending your time with shuttles to the hospital and doing chores around the house your spouse used to do. How will you cope with this new situation?

None of us likes to anticipate tragedy in our lives. But, like the fire drill, and the lifeboat muster, our chances of survival are improved if we are prepared.

So, what is a Financial Fire Drill? This drill is not a three minute exercise. It should take a few days. You should take a whole month for the first time you go through this drill. A year from now you can repeat the drill using a shorter period of time, perhaps only a week. Here's how the drill works:

• Set aside a specific time period for the drill. The purpose of the drill is to increase your understanding of what goes on in your normal life and how much your life could change if things went bad. Although you don't have to change the way you are spending money during the drill, why not make this experience more realistic. Actually make your spending decisions as though you are concerned about your financial survival.
• Question every cent you spend and ask yourself if you would spend it if you didn't have any income. This step is why you should consider doing the drill for a full month, to cover all the different things that happen in a month that you wouldn't see in only one week.
• Identify every source of income and realize who brings that money into the house.
• Identify what payments must be made on a regular basis and plan how you would deal with those payments if your income were reduced, or emergency spending drained your checking account. Do you have an Emergency Fund? How long would it last? Do you have assets that can be used to get money in a pinch?
• Analyze your household budget and ask what changes you would make if you suddenly found your financial ship is sinking.
• Look at what everyone in your household does to keep things working smoothly. Who does the food shopping? Who cleans the house? Who mows the lawn? Who drives the kids to sporting events? Write these things down, and ask yourself how they would get done if the person who does them now can't do them in the future. In a crisis, that person might be unavailable, or you might not be able to pay for the services provided by people outside your household.
  

When the exercise is over, you will have a newfound appreciation for many people and things in your life. You might realize that some of the things you do today can be done more efficiently, or not at all. You might also realize that some of the things you spend money on are unnecessary.

Most important, if something bad does happen to your family, you will know much more about where the financial escape hatches are and where to find a helping hand. You will be able to recognize the need to change and react much more quickly. You won't waste resources in the early stages of a crisis — you'll have them available for later.

Practicing for a fire drill doesn't mean the house will catch fire. Practicing the lifeboat muster doesn't mean the ship is going to sink. And, practicing the Financial Fire Drill doesn’t mean you will experience an economic tsunami. It only means you will be prepared if something does go wrong.

James W. Stone
Copyright 2009, James W. Stone, all rights reserved worldwide