egg in one basket

Shock Proofing Your Finances

What are the circumstances that might impact your financial future?  Done right, the financial planning process considers risks given your personal circumstances and risks that are common to everyone.   That said, it is probably fair to say that a global pandemic virtually shutting down the global economy was not one of the circumstances you planned for when you did your financial plan or retirement income plan.  And yet, it happened.    While it is impossible to plan for every possible circumstance, there are some steps you can take to shock proof your finances whether you are still in your working years or if you are retired.

  • Emergency Fund – This may seem old fashioned, but guess what, emergencies happen, income interruptions happen, and this doesn’t change as you journey through life. Whether it is a global pandemic, a garden variety recession, a major home repair or a life event, there will be times when you need access to extra money.  Debt is the last resort, it isn’t the answer.  So make sure you have an emergency fund with at least 3 – 6 months’ expenses covered.
  • Insurance – Have adequate insurance in place, whether that is life, disability, critical illness or long term care. Who relies on your income? Whose income do you rely on? A pandemic reminds us that misfortune can hit any of us. If an unexpected event hits your household, will everyone have enough resources? Unfortunately, everyday people experience disabilities, critical illnesses and premature death and if that hits home, you don’t want to be left worrying about money as well.
  • Investment Portfolio – If you don’t need income from your investment portfolio, most likely you can afford to ride out the ups and downs of the investment markets. However, if you are retired and relying on an income from that investment portfolio, take steps to ensure you aren’t forced to sell at a bad time to take your income.  Insufficient planning can compromise your lifetime income. If you are taking income, talk to your advisor and make sure you have investments immune to a market decline so you can give your other investments time to recover. Set aside 3 to 5 years of anticipated withdrawals.
  • Rental Income – many people of chosen to diversify their assets by investing in rental property. As we wrote in the book Bank On Yourself – Why Every Woman Should Plan Financially to be Single, Even if She’s Not, “Can you afford to carry it for a period of time if you don’t have a tenant paying you rent?...Real Estate can be a great wealth builder, but it generally requires a large amount of debt to finance the purchase.  Careful financial management is key to making it work and ensuring you are prepared for surprises”.   One of the shocking parts of this pandemic has been the very public encouragements for tenants to not pay rent.  As a landlord, you still have expenses, even if you can defer the mortgage.  Just like having an emergency fund, insurance, or safe investments set aside just in case, make sure you can carry your rental property for a period of time in the event you don’t have rental income coming in.

Life is full of surprises.  So when we all emerge from this current crisis, prioritize protecting yourself and your family for when the next surprise comes.  While we can’t plan for all of them, we can set ourselves up to shock proof our finances.

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