As I was sitting back looking at my financial goals for 2010, I couldn’t help but focus on being ready for the unknown. Both my wife and I are very well employed and aren’t feeling as if there is an imminent danger of losing our incomes but with all the gloom and doom around, it’s easy to find ourselves focusing on “what if”.
Rather than just sitting around worrying about what might happen, I’ve been mapping out our strategy for weathering any financial storm. I have done this previously but it’s always a good idea to periodically look at options. Most of it has to do with validating what we’ve been doing all along and then asking whether we can do more.
Here are the scenarios that we plan for:
Scenario 1:
My wife loses her job
Nothing really changes at our house because we can very comfortably live on my income. We’ll certainly take a harder look at our spending and do our best to boost our emergency fund further but we’ll be relatively unscathed by the job loss. This is possible because we spend less than we earn. Our total fixed bills each month total about 50% of our after tax income. Spending less than we earn is a key part of our overall financial strategy.
Scenario 2:
I lose my job
This is a much more significant issue for us. If I lose my job, we will have to immediately start reducing luxuries and stick to a very strict budget. With unemployment we would still have an excess of cash left over at the end of each month but we will definitely need to minimize spending to make that last. Once unemployment runs out, we’ll have to start dipping in to our emergency fund. Currently our emergency fund could keep us going for almost two years if my wife was working and I wasn’t. That two year clock starts AFTER unemployment runs out so we really have a pretty good buffer. The ability to last this long goes back to that core part of our financial strategy: spend less than you earn. By spending less than we earn, we are able to continually increase our savings and cover any emergencies that come up in day to day life. If we do face a financial setback, like a job loss, we are able to live comfortably much longer because we maintain a more modest lifestyle. Spending less than you earn is really a double impact concept! It gives you the ability to save more when you are working and spend less when you aren’t without feeling much of an impact.
Scenario 3:
We both lose our jobs
This isn’t a very likely scenario but it’s worth thinking about. If we were to both lose our jobs we would have to get very aggressive in our cost cutting. While we could get by if we were both getting unemployment, in the current state of the economy, we would immediately consider selling our house and moving to our vacation house that is paid for. Certainly it wouldn’t be a crisis because we could live off of our emergency fund for about 9 months once the unemployment runs out but it would be silly to try to hang on to two houses while we were indefinitely out of work. By selling one house, we would be able to keep our heads above the financial water line for a much longer period of time.
So, those are the doomsday scenarios that we think about being prepared for. We are fortunate that we haven’t been hit by a setback yet but we feel pretty confident that even if we do experience job losses, we can still weather the storm for a reasonable amount of time. As I mentioned in an earlier post, we’ll be focusing on increasing our savings this year to give us additional wiggle room for any financial setback.
Do you think about what you will do if you have a financial setback? How do you prepare?