Debt Management

Where are you financially vulnerable?


The economic storm clouds still haven’t parted, so wise consumers know their potential money weak spots, and have a plan if something breaks down

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Question for the expert

Dear New Frugal You,
I’m scared. Given the economy, I’m not sure what could happen next. Everywhere I turn, it’s all about unemployment, government shutdowns, gold and double-dip recessions. It’s beginning to get to me. How do I protect my family? What can I do to be prepared no matter what happens? — Future Shock

Answer for the expert

Dear Future Shock,
You’re right. There are a lot of storm clouds on the horizon. In uncertain times, it’s especially important to be prepared. So your question —  “How do I do that?” — is timely.

There are a number of ways to address the question. One that seems to be often overlooked is from a strategic viewpoint.

Any good chess player, tennis pro or general makes plans to win. But they also are keenly aware of their vulnerabilities, their weak spots — places that an opponent could attack and thwart his or her efforts.

The same thing is true of your financial well-being. You want to plan for success. But, as you mention in pointing out problems, you also need to be aware of where you are vulnerable. So let’s examine areas where most families could be exposed to financial danger.

The first exposure for most families is a loss of income. Unemployment is always a danger, especially now. It’s important to think through what would happen if you lost your job. Or if your pension check didn’t come. Or if your rental property were empty. Or if (fill in your own blank).

Do a little research and math and figure out what, if any, severance package you might receive. How much would unemployment bring in? What would be your new level of income? How would that compare to your expenses?

One thing you can do now is to cut expenses as close as possible to that lower income level. If you can do that by cutting extras, that’s great. If not, you need to consider what would be required if your job were lost. Better to do the planning now while there’s less pressure.

The second common exposure is a sudden, catastrophic bill. Depending on your finances, it could be something as simple as a major auto or home repair bill, or a large hospital bill.

For many, this could be the most vulnerable area. We struggle with any unexpected expense. Often we use credit cards to spread out the payments, which is an option as long as we have enough available credit and can handle the monthly minimum payments.

A better option would be an emergency fund. It is a fact that you’ll be putting money aside for unexpected expenses each month. You can write a check to the credit card company and pay them interest, or you can set money aside in a savings account and earn interest — a pitifully small amount of interest, but it’s something.

Some expenses are too big for an emergency fund — a large medical bill, for example. For those, you’ll want insurance.

The third common vulnerability is destruction of your assets. There is always a chance that your home could be destroyed by a hurricane, fire or other natural disaster. We’re also all well aware that declining markets can reduce the value of our homes, investments and 401(k) accounts.

For destruction of our home, insurance is the obvious answer. Talk with your agent to make sure that you have the proper coverages. Also, make sure that you have a large enough emergency fund to cover any deductibles, co-pays or exclusions.

Declining market values are a little more complicated. No one can know for sure when a stock market or housing market will decline. We can make an intelligent estimate. But precise predictions are difficult.

Don’t put yourself into a situation where a stock or housing market drop could jeopardize your finances. Spending paper gains can be dangerous. Just ask the people who borrowed their home equity in 2007 and spent it.

The current situation could create unique vulnerabilities. Don’t forget to think about what would happen if food and utility prices suddenly went up. What would your response be? A garden? A carpool?

Each family will have different vulnerabilities to consider. Your solutions likely will differ from your neighbors’ or co-workers’. Don’t be afraid to do some research or even get professional advice.

Most of us have concern for the future at one time or another. That’s normal, and current events make it easy to worry. But the healthiest response, both financially and emotionally, is to face those concerns and use them as warning lights to take any needed action.

See related: Set small, reasonable goals with a financial checklist, Frugality’s about value, not about being cheap

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