Recently, I heard from an old friend of mine that her family’s financial plans had been completely destroyed in an unexpected way. Her family was relying on a financial aid program from the state she lived in that paid for 80% of the daycare for her children in the event that both she and her husband were working full time.
Then the unexpected happened: her husband was called into active National Guard duty. The result? Their income, due to the one-time bump of National Guard duty, exceeded by $150 the state limit on what the family can earn to receive the 80% discount. Just like that their daycare bill went from $150 a month to $750 a month.
The unexpected can happen anytime, even when everything seems to be going perfectly well and you even have contingencies for the things that might happen. In their case, a seemingly good thing happened; he had an opportunity to serve in a worthwhile National Guard mission locally that lasted for only a short period, but when things came together, it was a complete disaster for their finances.
What can you do to prepare for the situation when all financial planning goes awry?
First, you must have an emergency fund. A six month emergency fund is the best thing you can possibly have for your family. It’s more important than a big lump in retirement or a nice mutual fund balance. It needs to be safe (meaning you have little or no risk of losing the balance) and it needs to be easily accessible when you need it. Some options for this include savings bonds or a high-yield savings account.
Second, you should not be spending as much as you bring in each month. Not only is this sound financial planning, it also teaches you to live a bit thriftfully so that if your financial situation changes, you can easily adapt.
Third, you should identify which services you use that you don’t particularly need, then see whether you can eliminate them now. Quite often, if you look at optional services through that lens (like Netflix or TiVo or so forth) and ask yourself whether you really use them enough to justify the cost. Once you’ve identified services that you could cut, why not ask yourself why you can’t cut them now? If you cut them, you’ll have extra money each month to build up your emergency fund or even invest it for your future.
In short, if you’re unprepared for unexpected events, then they will take you to the floor. Learn how to maneuver past them now so that when the disaster comes you’re ready to deal with it.