Friday, January 29, 2010

By 

James W. Stone

Managing your life is pretty easy when everything is going the way you expected it to. But there are times when the unexpected event requires a quick response on your part. Are you prepared for the unexpected?

I think we can agree that unexpected things do happen. But if you are prepared, you have the ability to rebound and steer clear of further damage. I liken this to a car crash. To give ourselves the best chance of maintaining control when driving, we are taught to keep both hands on the steering wheel, drive within posted speed limits, don't follow too closely, and maintain our car in good mechanical condition. Let’s say you are driving and suddenly a large animal jumps out from behind a bridge support and crashes into your car. If you are prepared and in control of your car, you will still hit the animal but that will probably be the worst of it. If you’re not prepared and not in control, the situation can get worse. You might hit another car or go off the road and encounter serious damage.

When you manage your money, in many respects you are in the same situation. We are taught to keep an Emergency Fund, avoid debt, and budget our spending. But sometimes the unexpected comes along. Yesterday, I got the county's bill for my property taxes. What a shock! I wasn't ready to make a substantially larger payment right now. Fortunately, I have money set aside for sudden jolts like this, and my family will get through this event without much concern. But if we were not prepared and in control of our money, a bill like this could have caused us to delay payments on other obligations. And would require us to pay interest, or even penalty payments.

There is a striking similarity between being a responsible driver and taking responsible actions with your money. There is also striking similarity when we compare our tendency to relax when the going gets easy. Whether we are driving on a fast moving interstate highway, or just living life while our paycheck comes in and the bills get paid, we tend to give ourselves permission to slack off just a little bit. We might drive with one hand and drink coffee with the other. We might buy ourselves a nice "toy" that will take a few months to pay off on our credit card. And most of the time we get away with it. But -- not all the time.

As long as nothing bad happens we're doing okay. In the driving example, if we suddenly have a need to steer with both hands (like when a large animal suddenly appears in the road), we must first put down the coffee. Precious time is lost and perhaps we totally lose control of the situation. In the money example, how many of us found that we could no longer steer where our family money went when the bank limited our credit line?

If you are driving an old jalopy and a small pothole causes a tire to blow out, you will wish you had replaced the tires before they were worn out. The same feeling exists when you haven't maintained your Emergency Fund and your deductible payment for the dentist is due. Or, as in my case, the property tax bill is higher than expected.

Now, let's look at what happens after the crisis. If you had good control of your car before an encounter with a surprise animal in the road, you have a much better chance that you kept your car on the road and were able to maintain control until you could stop the car. You will find damage to your car, but you (and your passengers) are alive. There's a good chance you could drive away and have the car repaired later. But, if you lost control, you could wind up in a ditch unable to do anything until a tow truck pulled you out … or worse.

If you keep a well-funded Emergency Fund and a sudden large bill needs to be paid, or you lose your job, you will still see some damage to your finances. But you'll be able to steer through much of the crisis. With any financial surprise you can instantly appreciate having an Emergency Fund. Depending on how bad the crisis is, you might also appreciate not having credit card debt to pay off, or knowing that your house value is greater than your mortgage balance. In fact, good financial planners will tell you to have an Emergency Fund that has enough money to carry you through at least six months without household income; to save 15% of your income for retirement later in life; to keep your credit cards paid in full each month; and not to mortgage you house for more than 80% of its market value.

If you're unlucky enough to encounter a major financial crisis, it may not be your fault that the crisis happens. But how well you survive the crisis is very much up to you and how well you have prepared for the unexpected.

As I look for one more similarity between managing money and driving, I'm reminded of the man who had a car accident with an oncoming drunk driver. As the paramedics were putting the man into the ambulance, the policeman told the man's wife how lucky he was to have his seat belt on and was able to keep the car from going over a nearby embankment. She responded, "I don't think he was so lucky. Look at him." The policeman replied, "You're right, let me rephrase that. He's not LUCKY … he's ALIVE because he had his seat belt on and was able to keep the car from going over the nearby embankment!"

Let me repeat, "How well you survive is very much up to you and how well you have prepared for the unexpected."

James W. Stone
(follow me at http://twitter.com/theJamesWStone)
Copyright 2010, James W. Stone, all rights reserved worldwide