Are You Prepared for a (Financial) Disaster?

By Mike Peterson
In April 25, 2011

Could Your Budget Survive a Pink Slip?  A Major (and Unplanned) Expense?  Perfecting Your Contingency Plan

You’ve probably heard at least one financial guru or TV-news talking head discussing the need for an emergency fund.  Some say you need $5,000 in the bank.  Some say $3,000 is plenty.  Many (I fall into this group) say the amount varies from person to person.  The logic is, by socking away some extra cash, you’ll be prepared if disaster hits.

It’s good advice.  But it’s not quite enough.  If you really want to survive in tough financial times, you’ll need more than extra cash.  You’ll need to know how to make that money last. You’ll need to know where you can cut costs.

Bottom line:  The real key to surviving a financial disaster is adaptability.  Would you know what to do if you or your spouse were suddenly laid off?  Or if an emergency medical expense or a surprise income tax bill wiped out your savings?

Don’t panic!  Here are six ways you can disaster-proof your family’s finances:

  1. Know what you need. Make a list of the things you absolutely must spend money on each month. This list should include things like rent or mortgage payments, credit card payments, utilities, gas, and very basic groceries.  This is – at the very least – what you’d need to have each month to get by.
  2. Decide what you can live without. Take another look at your monthly expenses, and decide which ones you could cut if you needed to free up some extra cash.  You might be surprised at how much you’d gain per month if you gave up some of your non-essential services like cable TV, online gaming, takeout meals, and gym memberships.
  3. Stock your pantry. Choose healthy items with long shelf lives, like pasta, rice, spaghetti sauce, and tuna.  Opt for frozen fruits and veggies.  And while I normally caution against buying in bulk, this is one situation where it’s not a bad idea – a supersized jar of peanut butter is a cost-effective way to feed the whole family if you’re in a dire financial situation.  A good way to build up your family’s food bank is to buy a few extras every time you go grocery shopping.  Look for sales and take advantage of coupons – and go generic whenever possible (in most cases, the store brand is every bit as good).
  4. Find alternatives. If you need to, say, cut off your high-speed Internet service, you should know where to go for free wi-fi (many fast food joints and cafes will let you linger with your laptop if you buy a cup of coffee, and most libraries offer free Internet access).  Find out how much money you’d save if you took the bus to work — and know the route you’d take to get there.
  5. Earn some extra money. A financial cushion can soften the blow of a financial hardship.  Help build up your emergency fund by finding some extra sources of income.  Sell stuff on eBay.  Get a part-time job.  Walk dogs, babysit, or run errands for your neighbors.  Are you good at taking photos, writing, or fixing things?  Consider selling your services as a freelancer.
  6. Don’t use your credit card(s). It’s super-tempting to break out the plastic in tough times, but it’s critical that you resist the urge to charge your day-to-day living expenses.  If you’re already paying a credit card bill, focus on paying it off.  If you don’t have any credit card debt, consider yourself lucky – keep it that way.

And one more tip:  Plan ahead.  Financial woes are stressful – the more you plan, the less you’ll have to worry about if you find yourself in a financial emergency.  Set aside a few hours and figure out your family’s plan:  How much money will you need per month?  What services or expenses can you do without?  How can you bring in some extra cash if necessary?

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.