During times like 2008, it is wise to take a day and review your finances. While history tells us the investment markets will recover and most likely reach new highs, ignoring the current economic environment is not wise. Not only is it important to review retirement accounts and determine whether updated allocations are required to take advantage of changing conditions, it is also smart to review the outstanding debt you may owe on credit cards, cars, and any other short-term debt. Make sure you are not at the limits of your credit cards and you know the minimum payments that must be paid.
In the event you work in an industry where you might be subject to furlough or layoff, it would be beneficial to rein in credit card debt and pay off any cards with small balances. Shift to a 'need' versus 'want' mentality when potential purchases are considered. If an item is needed, then pay with cash to avoid increasing debt.
In addition to the liabilities, a review of cash accounts is also important during difficult times. Determine the excess cash that generally stays in the checking account, the amount of savings you may have, as well as other sources of emergency funds. Make sure you have replenished these funds, if you have had to dip into these accounts in recent times. If you find your emergency funds short of where they should be, this would be time to put off any extra purchases and use all available cash to bring the emergency funds back to their proper level. I recommend to my clients to pay only the minimum credit card payments and to use the excess to shift to the emergency funds. Once the emergency fund is back to its proper level, then you can continue normal payments to the credit cards. The reason for this strategy is to avoid having to charge and pay over time any type of emergency expenditure.
For my clients, we generally discuss two types of emergency funds. The first is the 'put and take' account. This is the amount that in most years you will need. For each family, this amount varies, but $3,000 to $10,000 generally covers most quick needs. These funds should be kept in a savings account where they are accessible, as well as easily replenished when used. These funds will handle the insurance deductible when there is an accident or the major car or home repair when they occur.
The second tier of emergency funds serves two purposes. For those still working, these funds are set aside so they can be used when there is a loss of income or a significant emergency occurs. Some times, these amounts provide peace of mind as well. Since these funds are generally only accessed once in five or ten years, they should be invested where the performance potential is higher than savings but still liquid. Additionally, when cash may be needed, the required amount can be accessed. For some, laddered CDs will work. This is where you have four or five CDs each with a maturity 60 or 90 days longer than the other. Thus, when each CD matures, it is renewed for the longest term of your CDs. This way, every 60 or 90 days one of your CDs will be maturing and available for use if required.
For others, the cash value inside an insurance policy can also work. It is important to understand though if the cash value of a life insurance policy is accessed, these funds must be restored once the emergency is over in order for the life insurance policy to continue to provide its benefits.
These are general rules that most families can follow. However, everyone is unique, and what works for one may not work for another. Not everyone has the discipline to only purchase those items they truly 'need' when times may become difficult. The new clothes, games, or appliances may provide a sense of success, and the worry may go away for a week or two. That is until the bill is received and payments must be made. If you have difficulty in this area, promise yourself when the urge to purchase a new item arises that you will wait a week prior to making the purchase. As a result of this pause, you may find most of the items you wanted to purchase are never made. Financial success does require discipline. Just find a way where your discipline can help you succeed.
HOW TO REACH THE WRITER
Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.