How to Avoid Your Next Money Crisis: A 5-Step Prep Plan

Money crisis
Money crisis

What's a surefire way to inspire yourself to clean the house? Schedule a party. And there's nothing like unexpected visitors to get the job done even faster.

Deadlines -- or out-of-the-blue events -- are also great motivators when it comes to financial housekeeping. Baby on the way? Adjustable mortgage rate about to re-set? Portfolio allocation all out of whack? Household income suddenly cut in half? Give us a pressing reason to get our money affairs in order, and the job may just get done.

But there's a big difference between getting it done quickly and getting it done right.

Financial frenzies come in many flavors. But the most common triggers that send folks into money triage mode are the death of a loved one, divorce/marriage, dealing with complex financial products, and preparing for retirement.

These life/money events are fraught with emotion and unfamiliar challenges, and there is no more lethal cocktail than anxiety, complexity and a tight deadline. Even worse, spur-of-the-moment money decisions often lead to even bigger problems down the road.

But you can avoid all this unpleasantness. The key to sailing through a crisis is simple: Prepare in advance.

Five Steps for Preparing for the Expected and the Unexpected

Here's a five-step plan that'll ensure you're prepared for issues you've already identified, along with any crises that might pop up out of the blue.

1. Take a Snapshot of Your Finances

"Be prepared" is a good motto for scouts and income-earning adults alike. At the very least, you want a snapshot of your overall financial landscape -- how much you own, what you owe, a sense of your general financial priorities. Use this must-do quarterly review checklist to get your personal balance sheet in order in a snap. The more soul-searching you do now, the better you'll be able to identify any money messes that need to be contained.

2. Earmark Any Issues

Think about your immediate money questions ("Is it worthwhile to refinance?" "Should I sell this stock?") and your future ones ("What if Biff doesn't get a football scholarship?" "What if Fluffy needs long-term pet care?"). Are there any financial "uh-ohs" on the horizon? You actually can prepare for unexpected emergencies with an adequate emergency cash cushion. (Use these guidelines to determine how much emergency savings should you have.) Other issues may require that you seek outside counsel. If that's the case ...

3. Decide What Kind of Outside Help You Want

What kind of professional opinion do you need? You probably need a lawyer to help you write a will, but perhaps you can find the right insurance on your own. Figure out how much hand-holding you want before you seek paid professional advice. Some factors that will determine what kind of help and how much you need include:

  • How much money you have

  • The complexity of your finances

  • Your interest in learning about/researching financial products

  • Your available time to devote to managing/researching financial matters

  • Your level of expertise in investing, asset allocation, estate planning, etc.

  • How confident you are in your level of understanding

There are all kinds of advice for sale. (Heck, the number of professional acronyms we've seen on business cards makes full use of the entire alphabet 10 times over.) In "You Need a Financial Advisor," my colleague Robert Brokamp goes through the various flavors of financial advisors.

4. Consider Costs

Financial advice can cost hundreds to thousands of dollars -- on an ongoing, single-use, or occasional basis. You might be surprised to learn, however, that finding out how your advisor gets paid is even more important to your bottom line than how much he or she charges to dispense financial advice.

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Before you go shopping for a money cleanup team -- or hire someone to give you a one-time second opinion -- find out how your pro earns a paycheck. Is the advisor paid via flat fee? Hourly? Asset-based? By commission? (Here's a guide to how money pros make their money.) The answer to that question is the easiest way to determine whether the recommendations you'll receive are based on what's best for your financial situation, or what's most lucrative for theirs.

If you're looking for affordable, unbiased help on specific issues, finding a fee-only advisor who charges by the hour or by the project makes the most sense. Of course, you'll need to ask other questions to make sure you two are a good fit. Here's a free advisor questionnaire to use as you interview potential help.

5. Act!

You've paid for good advice from a trusted source. The next step may seem obvious -- put the plan in action! -- but you might be surprised how many people fail on the follow-through. Don't wait for a moment of crisis to act. While you've got the time and wherewithal to put things in their proper place, use the momentum (hey, you're already done most of the heavy lifting!) to get the job done -- and done right.

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