You are going to be fired from your job this Friday.

Read that statement again. Close your eyes for a moment and imagine if that sentence were true in your own life? Would you be ready?

Most people would panic if they came into work and found a pink slip, simply because they’re not in a financial place to handle such a situation. They’d furiously apply for unemployment benefits, start chugging the Pepto-Bismol, and hurl their resume out there to a hundred new places, hoping (praying) for a new job to come along quickly.

How could one be prepared for such a blow? In an uncertain economy, such a blow could happen at any time, no matter how “safe” you think your job is - do you remember the “safety” of the Enron folks in 2002-2003, for instance?

Right now, start acting as if the above statement is true at all times. Believe constantly that you’re just a few days from being fired and then try on a few of these new behaviors for size.

Stop spending foolishly This is the biggest first step. If you’re spending money in needless ways, curb them severely until you’re in a state of financial independence - and if the thought of getting fired makes your stomach tighten, you’re not there yet.

Start building a solid emergency fund Count every dependent you have. For each one of those, you should have at least two months of living expenses in a high-yield savings account - I’d recommend three months per dependent. That way, if everything falls apart, your family is protected.

Build a real budget This doesn’t mean pulling numbers out of the air and assigning them to arbitrary categories. This means counting up every dime you spend for a month, sitting down with all of it, figuring out where you can cut the fat, and setting some goals for the next month. Do that over and over again and you’ll start feeling in control of your spending.

Pay off all of your high-interest debt Sit down with all of your debts and construct a debt repayment plan. Given that this is urgent, I recommend starting with the debt with the smallest balance, just to get rid of that monthly payment, and keep working from there.

Minimize your required monthly bills Also look at all of the bills you pay in a given month. Could any of them be trimmed back a little or even eliminated? Look especially at any entertainment bills and any memberships you pay for. Do you use these enough to justify the cost? Remember, every dollar of fat you trim here will roll straight into getting rid of those debts much faster.

Start firming up your social network Invest some time touching base with as many people as you know. See what they’re up to these days. You shouldn’t actually look for job opportunities, but instead look for opportunities to help out your social network. Make connections between people and such. If your social network is strong, when the moment comes and you do get that pink slip, you’ll have a lot of strings to pull to help you get back on your feet.

Keep your resume polished The best time to get your resume in great shape is right now, when you don’t have the stress of needing to cram something together. Polish it up and get it looking good.

Spend your spare time developing skills or laying the groundwork for a side business. Don’t spend your spare time watching American Idol - spend it improving yourself and making sure you’re in a more secure position with multiple streams of income.

This is a waste of time since I’m not going to be fired! There are two immediate responses to this complaint. First, when that pink slip shows up on your desk, this “complaint” will seem really foolish. Second, even if that pink slip never does show up, executing these steps over a period of time will create a situation where you can walk away from your job whenever you want to - the feeling of true financial freedom.

So take that phrase and put it all over your environment so you’ll see it time and time again. It will remind you throughout the day to keep your eye on the ball and put yourself in a position where it doesn’t matter any more.

Here it is, one more time:

You are going to be fired from your job this Friday.

Roger writes in with an interesting question:

When you talk about “walk away from it all” money, how would you estimate that? I know it would be different for each person, but what elements do you take in mind, and what percentage of savings or what size emergency fund (24 months of living expenses, for example?) would you constitute reaching that point?

Before you even start looking at this, you need to have a very strong bead on your realistic spending over the course of a year. What do you really spend over the course of a year? Do you anticipate something significant changing that in the future? Figure out your real numbers, not the ones you think you spend in your head.

I think this largely depends on how you define “walk away from it all” money. I see three common definitions:

First, enough money so that you can survive a cold career change without skipping a beat. This is the easiest level to achieve. Basically, it means that you are financially secure enough that you could decide to just go back to college and start over with a new career and financially survive all of that.

Second, enough money so that you survive an extended job loss, but are intending to work in some capacity for the rest of your life. In other words, the level of money you need to simply walk away from your job if you’re burnt out and spend three years recharging, but not enough to truly never work again. This is what most people think of when they think of “walk away” money, I believe.

Third, enough money so that you never work again, period.

Let’s look at each case, because they’re vastly different from each other.

“Cold Career Change” Money
This type of situation implies that you’re not walking away from the work force at all, merely changing direction. It may require a period of time for re-education, but for the most part the biggest change will likely be a reduction in salary at first that will recover over time.

Thus, this kind of “walk away” money is best figured in terms of a cash emergency fund. That fund should be able to replace your living expenses (plus 20% or so, in case of significant life changes) over the period of time you need for re-education, plus a small supplement for the first few years of your new career - say, another year’s worth of living expenses.

So, if you’re going to return to school to get your MBA, for example, you should have the two years’ worth of living expenses you’ll need to get through your schooling years, plus another year’s worth to help you with the readjustment to the workplace - three years’ worth.

During such a transition, one is usually covered in terms of health care. Most universities offer some degree of health support and once your studies are complete, you’ll roll onto another job.

So, my thumbnail for this scenario is a year’s worth of living expenses to help with re-entry, plus enough living expenses to cover the time needed to re-educate. The best way to save up for this relatively low amount is probably in cash in a high-yield savings account or in a certificate of deposit.

“Extended Drop-Out” Money
Some people want to walk away from everything for a while - they’re completely burnt out and need some time to recharge or discover their true passions. Such “wilderness years” usually end with an epiphany of some sort and a new direction in life.

Thus, this scenario basically consists of the “cold career change” scenario with an unspecified amount of time tied onto the front end.

This amount will need to be higher if you need to cover your health care costs during the recovery period. If you’ve got a supportive spouse with health care, this isn’t an issue, but if you’re going at this alone, you need to consider your health care situation during that period. Are you covered by COBRA? Do you have another plan available to you? Will you self-insure? Or will you just go off of health care entirely?

Aside from this aspect, though, a good thumbnail for this scenario is a year’s worth of living expenses to help with re-entry, plus enough living expenses to cover the time needed to re-educate and the time you expect to be in the “wilderness.” For many people, this would mean at least five years’ worth of living expenses.

In this scenario, it may be worthwhile, as you’re saving, to put some of it into the stock market in the form of index funds. Since your target is higher, you will likely be saving for a longer period of time, stretching it out into a period where the stock market might help you. Again, once you start to near the point of needing the money, take it out of stocks and put it someplace safer.

“Never Work Again” Money
When you start looking at walking away for good, the game changes yet again. You’ll need to have enough money saved up so that you’re protected from inflation over the long haul but also have enough to live on. The safest way to do this is to buy TIPS - treasury inflation protected securities. These are basically like any other treasury note you might buy - they’re backed by the federal government. The only difference is that they increase in value with the consumer price index - in other words, the value of the TIPS goes up with inflation.

To see how this works, imagine you buy a TIPS for $10,000 this year. It’s got a coupon rate of 4.25% - meaning that each year, it pays out 4.25% of its principal to you. Each year, though, the government adjusts the value of this investment upwards to match the increase in the consumer price index. So, if the consumer price index goes up 3%, the principal on your TIPS goes up to $10,300. Since you’re getting paid 4.25% of the face value of that note, your old payment before the upward adjustment would have been $425 a year. After the adjustment, it’s $437.75 - a little bit of a bump.

This is the safest place to put your money. If you’re willing to swallow more risk, you can balance these with stocks and such, but if you’re intending to never work again, you do want your income to be stable.

How much do I need? Figure up how much you need for living expenses over a year (including paying for your own health insurance), add 25% to that (for an emergency buffer), and then figure up what your taxes would be. Add those three numbers together to see how much you’ll need those TIPS to produce each year. The advantage of being in TIPS is that you don’t have to worry about inflation - it’s covered.

So, let’s say your living expenses are $40,000 and you need another $10,000 for health care coverage for your family. Add another 25% on top of that for a buffer - you’ll need $62,500 a year. With taxes considered, that takes you up to almost exactly $70,000 a year. With the TIPS at 4.25%, you just divide that annual amount by the TIPS rate - giving you a target number of $1.65 million for a very secure long-term situation.

How do I get there? The best way to achieve that number is probably in stocks in an index fund. If you put away $1,000 a month into an index fund returning 8% a year, you’d hit your target number in 33 years - that’s a long way off.

Obviously, you can survive with less if you’re willing to take on risk and also if you’re going to rely on Social Security and Medicare in your senior years, or if you’re going to assume you’re living until you’re 90 and want to have nothing left by then. Both of those allow you to reduce your target number.

But for long-term security, nothing beats TIPS that will work in perpetuity to provide you the inflation-protected living expenses you need forever, plus give you something solid to pass down to your kids.

The Big Lesson
No matter what, it is always beneficial to start socking away money now for any big changes that may come your way in the future. At a bare minimum, it can help you retire earlier - it may also provide you a chance to completely change your life and walk away from a career that isn’t a good fit for you any more.

It was last April, a year ago now, that I really suffered the worst of my financial meltdown, and I finally woke up to the realization that I needed to make some drastic changes in the way I spent my money. I cut a ton of fat out of my spending, paid off all of my credit cards, paid off my vehicle, put thousands away in an emergency fund, and started this website.

In March of this year, I actually managed to spend less than 50% of my take-home after-tax income. I used the rest of that money to make a large payment on my student loan debt, do some investing, save for a home down payment, and build up my emergency fund even more. In April, I won’t quite get there because of an income tax payment (which I was able to simply write a check for without blinking), but if you eliminate that tax payment, I could have possibly been under 40% of my take-home spent.

The end result of this is that I’m undergoing a profound change in how I perceive the requirements of my life. This has manifested itself in a ton of ways, some simple and some profound. Here are some examples of what I’m talking about.

More lifestyle choices Last night when my wife and I were taking a serious look at our financial state and we realized that a lot of doors are now open to us that were simply not even worth considering before. It is now realistic for my wife to quit her job and become a stay-at-home mom; we could not have done that before. It’s even somewhat realistic for me to quit my job and become a stay-at-home dad.

Less insecurity about employment Because of that financial freedom, I no longer have to be constantly stressed out about work. I don’t have to go to work and walk on eggshells to make sure I don’t get “downsized” or “outsourced.” I no longer nod my head in agreement and keep my mouth shut during meetings when something doesn’t make sense - I find out what the real story is. Instead of simply following protocols, doing what I’m told, and twiddling my thumbs otherwise, I dig in and fix interesting and worthwhile problems. My work identity is transforming rapidly - and to my benefit. Even more interesting, I recently flat-out told my boss why the change occurred and he was completely dumbfounded.

Less stress about life I’m no longer worried about any bills, nor does the thought of a financial crisis really worry me. I used to have a hard time sleeping at night because of the financial stress, and my temper was also much shorter than it has been as of late. The sole difference is in my personal stress level, and that stress was mostly fueled by a feeling of being trapped and of hopelessness about my financial state. It’s gone now, and I’m much better for it.

Discovering and rediscovering the things that make me happy When I come home at night, I spend maybe an hour doing stuff I have to do, like housework and such, and the rest of the evening is spent doing what I want to do. With the biggest stresses gone from my life (work stress and financial stress), I realize how many interesting things I really want to spend my time on. I’ve rediscovered my love for writing (and you’re reading some of the output of that), been reading like a madman, been spending hours with my son (especially taking him to the park), been teaching myself how to play the piano (using one freely available to me), and basically doing stuff that seems enjoyable to me. What do all of these have in common? They cost very little money and bring me a lot of personal enjoyment.

So, the question to ask yourself is whether or not the stuff you spend your money on is worth sacrificing this type of freedom. Is splurging for a new Lexus versus driving your Caprice for a few more years really worth what you truly give up for it? For me, I will never go back to spending anywhere near all of my income in a given month, at least not until retirement. The freedom from spending money is an incredible freedom.

I wanted to finish up this week with what I felt was the biggest danger with financial independence. From my perspective, the biggest challenge that people on the cusp of financial independence face is the danger of a damaged relationship. Parents are afraid to let go, or push their children away roughly in an effort to get them to fly. Children can pull away too strongly or build up a relationship of adult financial dependence that is unhealthy for both parents and children.

The truth is that the nature of the parent-adult child relationship is changing from a parent-young child dynamic into a relationship of individuals with much more equality, and that shift is difficult, even for people who have known and loved each other from the earliest days. Financial relationships are just a part of this changing dynamic, but given the emotional challenges of money, many parents and many children end up quite hung up over the financial aspects of this transformation.

Here are some tips for how to handle this transition without damaging a lifelong relationship.

Communicate until you can’t communicate any more. As difficult as it can be, communication is the absolute key to surviving a transition like this. If something is bothering you, talk about it. If you don’t know what’s going on and want to be on the same page, make a phone call or stop by for a visit. The best part is that this transition can quite often strengthen the relationship.

Be very clear on expectations. If your child is at college and you’re thinking that you’re going to cut off their financial support before their junior year, let them know and tell them why as soon as you can. If you put it off until later, one of two things will happen, and both are bad. You will either give up on your decision to cut off support (letting yourself down and keeping your child from being independent for even longer), or else you’re going to drop a major, sudden bomb on your child, which is almost a guarantee that your relationship will be damaged.

The reverse is true if you’re the one becoming independent. If you are unclear as to where exactly the financial relationship between you and your parents is at, they’re probably as conflicted as you are. Take the first step and give them a call so that you are all on the same page on this. If you don’t, you’re bound to wake up one day with a sudden and major change in your financial status, something that no one wants.

If your child is still at home, sit down and talk about expectations. When do you want to cut financial dependence? How long do you expect to be financially dependent? If the answers to these questions are very far apart and it hasn’t been communicated, you’re asking for trouble.

Don’t know how to talk about this? Here are five “ice breaking” questions that can help get the ball rolling.

1. Where do you want to be in one year? In ten years?
2. What will those goals require in terms of support from the other?
3. What do you want our relationship to be like in one year? In ten years?
4. What are your dreams for the remainder of your life? What needs to happen in the short term to make those dreams happen?
5. What does independence really mean, good and bad?

Don’t just do it once and forget it; maintain the conversation. If you just talk about these issues once, it will help, but the dynamic of your relationship will continue to change for a while until you find a steady state you’re both comfortable with. Don’t let the issues become old and stale; hit upon your goals, perspectives, and feelings on a regular basis.

For many people, adulthood is a time to find your own path and walk alone, but some parents and children have difficulty breaking the financial ties that bind and the financial dependence continues well into traditional adulthood. This is a dangerous path, fraught with many challenges for both the parent and the child, some of which aren’t obvious at first glance. If you are a parent with a dependent adult child, or an adult child who relies on financial support from your parents to get by, keep the following in mind:

It makes saving for retirement and long term care difficult for the parents. If a parent is still spending a significant amount of money each month financially supporting an adult child, that’s money that is not going towards retirement investment, which means that the parents will be required to remain in the workforce longer and have a greater likelihood of becoming a financial burden upon their children late in life.

It reduces the parents’ standard of living. At a time when parents should be enjoying the fruits of a lifetime of work both in the workplace and in raising a family, they are still saddled with a serious financial commitment which reduces their security and their quality of life in the present.

It creates a sense of entitlement in the relationship. As time goes on, financial support moves from being appreciated to being expected. Children begin to treat financial support as part of their salary and begin to live a lifestyle beyond their means. They begin to feel entitled to this support. It is a natural occurrence; any repeating event soon becomes an expected one in a person’s life, like watching 24 on Monday evenings.

The longer the relationship continues, the more emotionally devastating ending the tie becomes. As the financial connection becomes entrenched, it becomes more difficult for both parent and child to cut that tie. The parent is often consumed with unnecessary guilt when the thought occurs and also is afraid of negative ramifications from cutting the tie, while the child is ever more reliant on that financial support to sustain their lifestyle.

The key to severing such ties is to do it as early as possible. When a child is able to walk alone, that child should walk alone. It allows for a healthy relationship between parents and children that isn’t tied to a financial situation, reduces the impact of emotional damage, and allows the parents the financial freedom to plan for their future.

College-age readers (and younger), this post is directly aimed at you. Paying for college isn’t easy, whether it’s you doing it or your parents covering it for you. Unless you were very lucky in the scholarship department, someone is facing a financial hardship from this: your parents, you, your future self, or maybe even someone else. No matter who is paying for your education, there are still some principles that you should follow in order to keep your financial life and your relationship with your parents in good shape.

First, drop any resentment you have. If your parents elected not to pay for your education, that’s their choice. Do you consider yourself to be an adult? Then act like one. If you don’t consider yourself to be an adult, drop out of college, move back into your parents’ basement, and play video games for a few more years. That’ll show ‘em how mature you are.

Now that I’ve got your attention (and if you’re still here, you’re more mature than most college students), a big part of being an adult is dealing with adversity, and resentment is one of the most sure-fire ways to fail when dealing with adversity. You made the choice to go to college and this degree will benefit you and only you, so it stands to reason that you are the person who should bear the brunt of the cost. If your parents are paying for a portion (or even all) of the expense of college, that is a gift. Consider yourself very lucky, not entitled.

Second, if you’re getting nothing out of college, get out of college. If you’re just barely passing your courses and spend all of your time, well, wasting time, college may not be the place for you. Take a one year hiatus and do something completely different, something that sounds authentically exciting to you. Live like a homeless person in Europe for a year. Wash dishes in the best restaurant in town and observe what’s going on in their kitchen. Play your guitar on the street corner for change. Sign up for a volunteer corps. Do that one thing that sounds exciting to you and do it now so you aren’t wasting money sitting in your dorm room wondering what the hell you’re going to do with your life.

Third, even if your parents are covering all of it, don’t turn down opportunities for aid and scholarships. Spend some time in the financial aid office and see if there are any additional packages that can benefit your situation. Even if the cost you’re reducing is not your own, your parents will have more money with which to both spend and save for their own retirement (think of it this way: if they have more in retirement, there’s less chance you’ll have to pay for their care when the time comes). No matter what, seeking out financial aid and scholarships helps your financial picture in the long run.

Last but perhaps most importantly, take advantage of the college experience and use it to reduce costs, whether you’re footing the bill or not. I wrote about this topic in detail in the past, so I’ll just summarize by saying that college affords you a lot of ways to live cheaply and have amazing experiences on the state’s dime. Don’t spend your time dropping $200 on a new pair of pants at the mall when your campus is loaded with tons of free opportunities - and some amazing ones that can even put cash in your pocket.

No matter what, though, never spend your time in college harboring a resentment against your parents for what they did and didn’t spend on you. You are taking the reins of your own life now, and by framing your life in the context of what your parents are doing just continues the cycle of childhood. If you do nothing else because of this article, grow up and realize that as an adult you are the one responsible for the decisions. Your parents are just there to offer a helping hand if they can, nothing more, nothing less.

As a parent of a young child, I’m already struggling with the question of whether or not I should pay for my child’s post-secondary education, and how much I should pay for if I do. To put it simply, there is no easy answer to the question; if you were hoping to be told what to do, look elsewhere. Instead, here are several important points to consider if you’re thinking about how to handle financial commitments for your child’s education.

There is a solid case for no support at all. My parents gave me almost no financial support after I left for college outside of housing and food during my first college summer (the only one where I returned to my hometown). Is this better or worse? I don’t know for sure, but I do know that as a mature adult, I have some powerful reflections on the college experience from a financial perspective that I would not have now if I had financial support. Don’t assume that you have to save for your child’s education; instead, ask yourself what is right.

Start saving now. Every day you delay is a day that it will be harder to pay for your child’s education. If you’re going to pay for it, start now, even with small amounts. Open up a 529 college savings account so the earnings are tax-free (if used for educational purposes) and set up an automatic deduction plan so that your money goes into there automatically each week or month. This way, it will just quietly build up over time until you’re ready to use it.

Save equally for all of your children. I started my son’s 529 just before he was born and I put the same amount in it each month, along with contributing any cash gifts he receives (at least as an infant and as a toddler). If I have any children, I will do exactly the same thing for them. Just to make sure it is truly equal, I adjust the amount I deposit on an annual basis for inflation, so although my son’s earliest payments are smaller than my future childrens’ earliest payments will be, his college costs won’t be quite as great because he will attend college earlier. As far as I am concerned, the money in this account is his; it will be used first for college expenses - and if he doesn’t need it then, it will be given to him for post-graduation things like a home down payment. The same will be true of any other children I might have.

Don’t punish a child for success. If one child works hard and earns a scholarship, that child may be resentful if you then decide that you don’t have to pay for any of their education, but then spend tens of thousands of dollars educating that child’s sibling. What do they learn? That hard work doesn’t really matter because someone else will just step in and level the playing field anyway. Being unequal to your children can build resentment and misunderstanding. Keep what you’ve saved for that child for graduate school or, in the event that they do other things, transfer that money to them in another fashion. If you simply must do this, have an open family meeting about it with everyone involved; if you’re unwilling to do that, then you need to do some serious soul-searching about larger family issues.

Similarly, don’t reward a child for failure. If one child works like crazy to earn a lot of financial aid, while another child laughs it off, don’t reward the second child with the lion’s share of your educational savings. Just because one child is resourceful and a hard worker and another child is not does not mean one child should be given more than the other.

Be open about what you can give. Never, ever dangle a carrot in front of your child that isn’t really there. For example, while I was in grade school and junior high, my parents said that if I got into a college, they would “help me out a lot.” Well, when I finished my sophomore year in high school and got some very strong scores on my college exams and it became clear that college was in my future, they suddenly admitted to me that they had nothing at all for me and that their promises were merely a carrot to try to convince me to work harder at school. This was one of the largest disappointments of my life and it led to a short period where I basically didn’t care about getting into college at all. Never put your child into that situation.

In summary, decide early what you’re going to do, be equal and fair about it, and be clear to your child exactly what they can expect for aid.

For many young people, one of the biggest fears of financial independence revolves around what happens in the event of a disaster. Should you expect to be able to move back in if something goes awry? Will they provide financial assistance? Or are you on your own? Although it is best to expect no assistance at all and plan accordingly, it is often better for everyone to understand what others are thinking and expecting of them, so that when a crisis comes, there are no damaged expectation and damaged relationships.

Here are some ways to handle a financial crisis with regards to your parents, both before and during the crisis.

Don’t expect anything. Being independent means that you’re not depending on anyone for anything. Remember that in your independence, your parents are setting you up to be their equal, not their child. They don’t rely on their parents for support (well, if they do, there are bigger familial problems than this post can address), so if you wish to be considered an equal, why should you expect the same?

Talk to your parents about these “what ifs.” If you’re considering a move with some risk, simply find out what your parachute is like. Don’t assume anything at all; simply have a healthy conversation where everyone’s beliefs and expectations are laid out on the table. Quite often, your parents will be able to offer you assistance in nonfinancial ways that you might not even imagine.

Don’t hold a grudge if you don’t hear what you hope to hear. If you believe that your parents would help you no matter what and you hear otherwise, don’t hold a grudge against them. A healthy relationship with parents can be an invaluable thing to have through thick and thin; just because they don’t provide financial support to you any more is a poor reason to abandon that relationship.

When a crisis occurs, be open about it. Once it is clear that there is no financial expectation, you should be open with your parents about financial crises. They can provide emotional support, counseling, and perhaps other invaluable nonfinancial assistance.

Ask for their assistance in planning in advance for a crisis. This is a very useful step for protecting yourself from future mistakes. Suggest that your parents set up a savings account with you that can only be withdrawn upon with both of your signatures, then make deposits into this account as an emergency fund. Your parents may be willing to make some deposits as well. Then, if you face a financial crisis, you’ve got several things in your corner: great counselors who can provide advice and financial resources to draw upon if there is no other way out. Plus, setting up such a fund and sticking to it is perhaps the clearest sign of all to your parents that you are being successfully independent. Even better, this measure prevents you from dipping into that emergency fund for unnecessary things.