Worried About a Money Disaster? Here's Your Plan B
By Robert Brokamp
Are you an "awfulizer"? Do you fear that something awful is around the corner, especially when it comes to your finances?
Maybe that's not such a bad thing after all, given the recessions, layoffs, and market crashes of recent years. In fact, you can turn awfulizing to your advantage by making a plan for what would happen if your family's situation changed significantly.
Call it the pessimist's Plan B -- expenses you'd cut, which relatives you'd move in with, even where you'd rendezvous in case a catastrophe prevents you from getting home. Even if you never have to put your Plan B into effect, knowing it's there will provide you with peace of mind.
Getting from Plan A to Plan B
You already have a Plan A -- you're living it. Plan A starts with your income, which determines how much you can spend, how much you can save, and how long it will take to achieve your financial goals.
Plan B covers what you'll do in case there's a disruption to that income, whether from your job (if you're still working) or your portfolio (if you're retired).
Here are five strategies to consider for your Plan B -- actions to take now and to know you can take in the future:
1. Invest in your human capital. No matter what kind of job you have, think of yourself as self-employed. As fund manager John Hussman says, even people who get steady paychecks are "entrepreneurs in the sense that they are in the business of selling labor services." Solidify your good standing with your company and customers, have in mind a list of other employers or jobs you would investigate, and stay active in your network.
2. Prioritize your expenses. In other words, live below your means. Spending less today means needing less in an emergency -- and being able to accept solutions that result in a lower income. Look at any household budget, and you'll see plenty of categories that can be trimmed: travel, dining out, gym memberships, and charitable contributions. Many items we think of as necessities are really luxuries, such as cable TV, high-priced cell plans, high-speed Internet, and new clothes.
3. Put your home to work. For many homeowners, the mortgage is their largest expense, and the house is their biggest asset. To lower that expense or put equity to work, you might downsize, move to a location with a lower cost of living, or take out a reverse mortgage if you're 62 or older.
4. Sell your stuff. You own more than a portfolio and a house: You also own everything in your house, and you can sell much of it in a pinch. My family made more than $2,000 selling things we no longer needed before moving to a new home. We could have parted with even more if we had to.
5. Know where your cash will come from. If you have an emergency fund, congratulations! But if you depleted that, what's next? In a recent survey, 61% of people said they'd tap their 401(k). But that leads to taxes and penalties if you're not 59-and-a-half, and it can compromise your retirement. Everyone's case is different, but here's a general order of where to turn for cash:
- Emergency fund
- Investments in nonretirement accounts
- Property or possessions you can sell
- Contributions to a Roth IRA, but not earnings
- Home equity loan, only if you know your situation is temporary and you have no doubts about paying it off
- Credit cards
- 401(k) loan, only if you will continue to have the same employer and you have no doubts about paying it off
- Retirement accounts
Your financial future depends on returns, assets, timing, and other variables you can't control. Knowing now how you'll react if a sudden change throws your plan off course is smart on several fronts. By having a Plan B, you'll make better decisions, and you'll put yourself in the best position to get back on track without awfulizing holding you back.
Robert Brokamp is a Certified Financial Planner and lead advisor of The Motley Fool Rule Your Retirement service.