5/04/2010

A Financial Storm May be Blowing - Are you Ready?

Many times when we think about preparing for disasters, we think of those catastrophic events like hurricanes, flu epidemics or terrorist attacks. While we do live in a dangerous world with major threats that impact us, the greater dangers that threaten to topple our financial house of cards may be much less noticeable. It is generally the small disaster that will throw our plans into crisis.

Consider the following unexpected crises... would you be able to weather these financial storms of life?

1. $1,000 deductible for a car accident
2. Child out of school for a week with a contagious disease
3. 10% pay reduction
4. 6 weeks of bedrest while you recuperate from an injury
5. New tires for your car
6. Refrigerator broken
7. Gas prices increase by .75 per gallon
8. Tree topples onto your home during a windstorm
9. Parent requires full time assistance at home
10. Long term illness requiring ongoing medical treatment
11. Job Loss

For most families, these seemingly small setbacks can spell financial disaster if your family does not have a plan. Studies show that households experience on average approximiately $2,000 of unexpected expenses every year, but the average savings for households was $392 in 2008.

So how do we meet those unexpected expenses? For many families unexpected expenses mean credit card debt, but they have also depleted any savings reserve, and sometimes our retirement funds in order to meet the obligations. As a nation we have relied on credit to sustain us through. Even now our government sets the example as they have been increasing the nations debt rolls throughout this economic crisis. We have learned from our leaders, but not always the best lessons.

How do we regain control of our future and prepare for those unexpected things? Here are some suggestions for building a storm shelter for your finances:

1. Prioritize your monthly spending: Having a spending plan that assigns priorities to the needs and is prepared to cut out the "wants" is critical. Seriously think through the purchases you make and determine if they are truly necessary.

2. Know what your are spending - Really: Tracking spending seems like a tedious exercise, but few households truly know what they are spending month to month without a monitoring system. Write down every single expense for the next 30 days and tally up the categories of spending.

3. Set boundaries around discretionary spending: While you may have enough money to go out to eat without pulling out the plastic, the extra meals may usurp the amount that you can tuck away into savings for emergencies, vacations, replacement car, education and retirement.

4. Cash is King: One way to keep the boundary intact is to use cash only for discretionary spending. When it is gone it is gone. People who use plastic or even checks for spending tend to spend more than those who use cash only.

5. Keep Savings Separate: Keep savings in a separate account that is not frequently used. Savings should be readily accessible, but not so much that you use it for monthly purchases.

6. Map out irregular spending: Set a limit that you can spend on things like, clothes, vacation, presents, trips, back to school etc. Add up the yearly spending and divide by 12. That is how much you will need to set aside to meet your need. Taking a $600 vacation? That will be $50 per month thank you! When you spread out the costs over the year, you will have less financial stress after the trip is over.

7. Just say no to credit cards: If something is important and necessary, save for it. Retailers know how to make us purchase emotionally. Let's take control back and avoid the pressures they place on us.

8. Prepare for the windfall: The problem with windfalls is that we have a surge of elation over the extra dollars available for spending and we tend to place those dollars where ever the greatest pull is at the time. That is why so many families end up with plasma TVs at tax time rather than paying down debt. If you map out a strategy for how extra funds will be applied, you can reduce the tendency to buy on impulse. If you create a plan ahead of time like 40% Debt Reduction, 40% Savings and 20% for fun you can use these unexpected windfalls to further your financial plan.

By gaining control over your monthly spending plan, you can increase your savings so that when the financial storm blows you can weather through and not have to worry about the ship sinking. There are tons of savings and debt reduction strategies at www.virginiasaves.org and if you need someone to help you build your storm shelter, just contact me at virginiasaves@gmail.com and one of our Financial Mentors would be glad to guide you through the process.

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