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Prepare for the worst

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With the U. S. economy in its own crisis, this sense of emergency is not just confined to people who have suffered a sudden reversal of events. It could be that your cushion of home equity has thinned, or that a stable career is no longer a sure thing. Then retirement funds are suffering from the amazing disappearing nest egg syndrome. If life threw you a curve would you be prepared?

For 2 out of 5 Americans the answer is yes. In a survey sponsored by the AARP (American Association of Retired People) of adults 40 through 79, they examined how we prepare for and react to the worst life has to offer. In this nation, the study showed that people are overconfident before trouble strikes. Afterward they are left shaken. In the area of job loss 32 percent say they are very prepared if they lose their jobs.

 

However, only 12 percent of the 32 percent have actually been jobless. A more common reaction, 44 percent were angry at themselves for not having been better prepared. Over half of the people surveyed, who had weathered a life crisis, called the financial impact very significant.  Richard Hisey, president of AARP Financial, states: “It's hard enough to contemplate these scenarios, let alone plan for them”. The reality is that sooner or later most of us will land in a crisis, so a little preparation can go a long way.

Imagine the worst scenario. People always think bad things will never happen to them. Optimism often masks fear according to Spencer Sherman, author of The Cure for Money. Most people don't really know how to look at money objectively. Fear causes us to be impulsive. Sherman has clients plan for life with one half of their money. This way if you face your worst fears you will not be immobilized by them, according to Sherman. In addition this helps you to refocus on what is really of value.

The planners checklist always starts with saving for emergencies. The time to build savings is today while you still can. About 26 percent of people that have lost their jobs had some warning, roughly a months notice. Approximately 42 percent had no notice. Most respondents to the survey did not have six months of expenses set aside. Try to be open and honest about your situation. People can not help you if they do not know you are having problems. You might be able to pick up work through friends, family, former co-workers, or church members. When you are in an emotional crisis, you have to find a way to harness energy and instead of it being negative, make it positive. When you share your experiences with others they can help you find your way back to clarity and objectivity, says Stephen Pollan, author of Lifelines for Money Misfortunes.

Job loss is not the only financial crisis we might face in life. There is disability, divorce and the death of a spouse. As far as disability goes we never think this will happen to us. No one ever thinks that they will get sick or terminally ill, until it happens. Our most important asset is our earning power. The only way to protect that is with insurance. With Social Security disability being what it is, if you are currently working, look into investing in disability insurance, both long and short term. Major illness ranks second to job loss as a financial hardship. If you have long term and short term disability be sure to examine the policy carefully. Make sure you are adequately insured. Policies may replace 30 to 70 percent of your income if you are disabled. Also, check for the definition of disability in the policy. Comparison shop your policy. If you have to file for disability through Social Security it takes them five years to approve you and you can not work at all during that time period. If you do perform any work, Social Security says that you are not disabled because you are working. During this five year time period of unemployment you have to have something to fall back on.

Divorce can leave you battling over the family home, your children, and other possessions. If you fight too much you end up spending all your money on attorney's fees. The lawyers are the ones that win when you get divorced. If you are divorcing, try to remain cordial with your ex, it could end up saving you lots of money on attorney's. If you go into a marriage with assets, you should consider a pre-nuptial agreement and trusts. Whenever possible couples should work on money matters together. Simple good habits of budgeting and investing jointly teaches couples not to fight over money. Both parties should establish credit. You might want a credit card to reserve a hotel room or rent a car. This way if divorce happens both parties have credit. In addition, if death happens then both parties have established credit. Also, in divorce there is the loss of one parties income. In effect you will now be living with one half of the income you normally live with.

With the death of a spouse you may be left to run an existing business that belonged to your spouse, which can be a burden. You should do back up planning for the business. The ability to act and not freeze up is essential in any crisis. When we worry, and worrying does not solve problems, we worry about what could happen tomorrow. Instead try to make today a good day, says Stephen Pollan. We can not change the past and we can not predict the future, so staying in today is a way to eliminate fear. Tomorrow will be there tomorrow. Being in financial distress is not a disgrace. Most of us get there at some point in our lives. It is a disgrace if you don't try to get out of financial distress.

So to recap, imagine the worst, save now while you can, work your network if the worst does happen, cover your assets (disability insurance), be an equal partner, prepare to act.