Everyone has heard this age-old Boy Scout motto. Our mothers preached it, and I preach it to me kids. Whether we say “An ounce of prevention is worth a pound of cure” or the more eloquent spin from Paul Newman that says “You can do anything, as long as you are prepared to deal with the consequences, ” it all comes down to Be Prepared.
There’s a lot of uncertainty around, now. More and more friends are finding themselves laid off and are searching for work. Few have back up plans or sufficient reserves to let them weather a severe storm, whether it’s a natural disaster or a personal or professional one.
Perhaps it’s having been raised by a parent who was raised by an immigrant grandmother, but I was always told I needed a Plan B, I needed to be independent and I needed a sense of security. As a result, it’s sometimes caused me to be a bit fearful and overly cautious about things, but as it turns out, this has been a pretty good strategy to weather the rockier seas. I thought I would pass along some of these rules of thumb, as prosaic as they may be, just in case no one else had immigrant-depression era thinking drilled into them growing up, even second-hand….
1. Your rent/mortgage payment should not exceed more than one week’s salary. In big cities, rent is really expensive, and this is a very hard rule to live by. But it’s one that will allow you to accumulate enough cash for living and cash reserves to see you through a rough patch or two without living your life vicariously through credit cards.
2. Pay yourself first. We need to become savers, and investing in your 401K alone is not enough. From your take home pay, you should really set aside five to ten percent for long-term savings. I do this with our on-line banking- I have automatic transfers from our checking to savings account set up, to do this automatically. I used to do it by making a transfer from checking to savings whenever I went to an ATM, but online is more efficient. This makes it an automatic process, just like a 401K for cash on hand. Likewise, this cushion provides overdraft protection, should there ever be a short-fall in the checking account.
3. If at all possible, have a goal of saving up 3 months (or longer) cash reserves. This is tough for a lot of people. But if you follow Rule #2, you’ll be surprised how your cushion grows over time. Cash on hand helps you long term, and will help you deal with all sorts of emergencies, without having to rely on high-interest credit cards you may not be able to pay off right away. Using credit cards for emergencies like a broken water heater , especially if you can’t pay it off in the same month is the equivalent of a 20% increase in costs to money you had to spend in an emergency- who needs that?? Get yourself a cushion and nest egg
4. If things are bad- triage your finances and expenses. One of my first jobs after college and before going to law school was working in a small law firm that did collections, foreclosures and trust & estate work. You find out very quickly how much trouble people get themselves into when they can’t manage their finances well. But you also learn that there are certain “floats” built into the system. For example, getting behind on your credit cards may damage your credit rating, but getting behind in your rent or mortgage means you won’t have a place to live. If there’s not enough money to go around in a month, you need to figure out who to pay first. Here’s a hierarchy of who I think you should pay and in what order:
- Rent/Mortgage- this is usually a significant expense, and it’s one of the hardest ones to ‘make up’ if you get behind. Plus keep in mind that it doesn’t matter if you paid the heat and water bill if you don’t have the place where the heat and water are.
- Utilities-while you can get a month or so behind with electric, heat and water before they come and turn it all off. there are also rules public utilities have to follow before they turn it all off, so this expense, while absolutely necessary has a short-term flex compared to rent/mortgage payments.
- Cable, Internet, and cell phone, however, should be considered extras and luxuries. Even for the wired community who feel a day without wifi is like day without sunshine, consider that you can still access the internet from many public spaces for free, or you can use the computers at your local library. We’ve come to consider these monthly expenses as necessary as having a roof over our heads, but again, without a roof, your cable does you no good whatsoever.
- Food – cutting out any undo expenses, such as eating out, cappuccinos and the like also should be some of the first expenses to be trimmed out of your budget. You might consider you daily breakfast muffin as a necessity, but an english muffin at home is probably better for you and less expensive. Pack your own lunch. Buy in bulk. Check Unit prices- sometimes the smaller one can be cheaper rather than the larger one- pay attention to those tags on the grocery shelves.
We all know what we should do, but we fall into patterns where our habits are very hard to change. But changing those habits into ones that help us secure our home, our future and our assets is really important, and will make the difference between weathering hard times and swamping your boat for now and into the future
5. Plan Ahead and Have a Plan B. I think it always makes sense to have a back up plan. What would you do if you lost your job tomorrow? What would happen if your spouse lost his/her job tomorrow? What’s your back up plan? How long would it take you to implement it? For example, if you need training before re-entering the workforce, how long will that take? If you get a new job, they may not pay you your first paycheck for two weeks, or even a month. Do you have enough reserves to cover that time? Do you have cash equivalent to “first, last and security” if you had to move to a new or cheaper apartment?
This stuff is incredibly boring, mundane, maternal lecture stuff- but your Mom always wants you to be safe, be happy, and be prepared against all the crazy and unpredictable things that can happen in the world. Be prepared for anything, and then it’s so much easier to take risks, because you always have a back-up plan ready to go. Even for those who are not particularly entrepreneurial in spirit, I would recommend reading a book like The Knack by Norm Brodsky. While he talks about understanding the cash flow of a business and how to understand the finances, I would argue every household in the US is like a small business, and we’ve gone too long trying to kid ourselves that we don’t all need to understand how money works and operates.
Don’t get into trouble by not understanding finances, money and triage of expenses. Otherwise, you will be left vulnerable to the quite harsh winds of economic change blowing through right now, and risk being capsized in the process.