Financial surprises can happen to anyone—even to those who've carefully prepared. But devising a Plan B can help you right yourself more quickly if you lose your job, incur large medical bills or otherwise face financial adversity.
Consider these things as you build your plan:
Know where you stand now.
"Start with very good budget," says Eleanor Blayney, CFP®, consumer advocate for the CFP Board in Washington, D.C. "Understand what's coming in and what's going out. Know which expenditures are fixed and which have some discretion in them."
Protect your financial position before a crisis by reducing debt, saving as much as you can and containing discretionary expenses. But if hard times hit, realize you also might have to look at cutting your fixed costs.
If you own your home, for example, could you move to a smaller house to make mortgage payments more manageable? Could you carpool a few days a week to save gas? Play "what if" with various scenarios as you review your budget.
Write out your goals.
Put your financial plans in writing, including your Plan B options.
"Once you set a goal, it's far more likely you'll achieve it, especially if you write it down," says Blayney.
If you've already identified your resources and anticipated the actions you'll take to cope with a financial snag, you'll be more prepared to find solutions.
Identify your income sources.
Protecting your income is a priority, says Blayney. "In this economy, the driver of everything is a job," she says. "Job loss is what most people have to defend against."
Think about what you would do for income if you lost your job. Could a working spouse cover household expenses in the short-term? Have you built up enough equity in your home to obtain a line of credit that you could fall back on?
Also take a realistic look at the industry you're in: Is there a high degree of turnover for people in your position? If so, decide what things you might do now that might help you hold onto your job. Or, if another career path interests you, invest the time to talk with those already working in the field, find out if you'll need additional education or talk to a career counselor about making a switch.
"Don't just take a new job to fix past financial problems," Blayney suggests. "Consider if this new profession has the 'legs' to carry you into the future."
Build separate emergency funds.
Saving money for an emergency is an integral part of any financial plan, but without special treatment, this account might be empty when you need it most.
"Ideally, emergency funds should be for true emergencies," says Blayney. "But people often dip into these accounts when they need car repairs or are replacing an appliance. Those aren't true emergencies."
Instead, Blayney suggests building a second fund for noncritical situations. Money from this "depreciation" fund could be used for normal repairs and upkeep—leaving money in the emergency fund intact.
If you're struggling now, don't go it alone. Seek assistance from a certified financial planner (CFP®) or a nonprofit credit counselor to help get back on your feet.
"It's important to not just fix the problem, but to understand how it happened and prevent it from happening again," Blayney says.
Find out more about creating a Plan B with these suggestions from State Farm.
Neither State Farm nor its agents provide tax or legal advice. Please consult your own tax or legal adviser regarding your specific circumstances.
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