Panic Time: How to Deal with Money Emergencies
By Al Jacobs
With luck, most of us match our family income to our costs of living and come out ahead of the game. At times, of course, we may experience a run of expenses, often unanticipated, that cause us to dip into savings or even float a temporary loan to tide us over. As long as the problems are resolvable and the costs controllable, we can usually work our way out of the difficulty. There are, however, circumstances that spell real trouble. Let’s look at three of these situations to see what can go wrong and how they may be tackled.
1. Family illness.
One of the principal reasons for economic hardship, often resulting in the filing of personal bankruptcy, is serious family illness. Medical services are expensive. It’s easily possible for an injury or ailment that results in major surgery and a hospital stay to generate bills exceeding one hundred thousand dollars. This is an expense that, without adequate medical insurance, can strain any budget. However, comprehensive medical policies are themselves costly, which partially explains why forty-seven million Americans are uninsured. In short, sickness can break the bank.
What then is the solution? Obviously you can’t avoid medical risk by simple healthful living . . . though you’d be wise to avoid bungee jumping and crocodile wrestling. I have a better suggestion. It’s a device known as catastrophic health insurance. The concept is basic. It’s an insurance policy with a high deductible and a low monthly premium. Under this program, you determine in advance what medical expense you are willing and able to personally fund. This sets the policy limits, which will vary depending on the plan you select. One example, an Aetna policy for a 25-year-old female with an $86 per month premium, offers a $5,000 deductible and 30 percent coinsurance thereafter, with an out-of-pocket limit of $7,500, and $1 million maximum benefit, or “cap.” Alternatives are available in that, generally, the premium rises as the deductible falls, and vice versa. Admittedly, this may not qualify as nirvana, but it can avoid catastrophic expenses that might wipe you out.
2. Loss of employment.
A second major cause of financial distress is job loss. It’s reported that more than 60 percent of Americans cannot meet regular living expenses within 30 days following termination of their salaries. If not for unemployment benefits, government food and shelter programs, and charitable organizations, that percentage might be even higher. And there is more to joblessness than financial hardship. A person’s inability to sustain a livelihood is debilitating. The loss of personal self-worth can be traumatic. In any event, financial self-sufficiency is the goal, with or without a job.
As with so many other aspects of life, we’d do well to adopt the Boy Scouts’ motto: Be prepared. The time to plan for a loss of employment is before that loss occurs. And the best way to insure you’ll not be caught short is to possess sufficient savings set aside to handle your living expenses for a reasonable period of time. By living expenses, this must include all your normal expenditures for housing, utilities, transportation, food, insurance, and debt payments, though you need not include savings, investment programs, charitable contributions, or entertainment. There are differences of opinion as to the specified time period, some as short as three months, with most advisors recommending six months. My personal belief is that six months is a bare minimum. You’ll be better served with a nest egg sufficient to maintain yourself in the style to which you’ve become accustomed for a full twelve months. As to the form of the assets, three months of your anticipated living expenses should be in a bank money market account, drawing the best FDIC-insured interest available. Another three months of your stash may be in 3-month bank CDs. For the balance of the funds, 6-month CDs is suitable. Under no circumstances may any of these assets be exposed to risk of any sort. This means nothing that experiences market fluctuation, including but not limited to stocks, corporate bonds, or mutual funds. It’s hard, cold, moola you want, for when the going gets tough, cash is king.
3. Marital breakup.
As unpleasant as it may be, the solemn oath so frequently uttered—To love, honor, and obey (or cherish, depending upon gender), till death do us part—is not always a gilt-edged guarantee. When, as so frequently happens, a parting of the ways occurs, it’s often accompanied by accusations and recriminations, followed thereafter with a precipitous drop in income. Statistics reveal that the wife is usually the bigger loser, though with unanticipated legal costs, creation of a second household, and change in lifestyle, both spouses normally experience the financial fallout.
Once again it’s advanced planning that may save the day. The device used is a premarital agreement, often known as a “prenuptial agreement” or “prenup,” which is simply a written contract created by two persons before they are wed. Typically, these agreements list the assets each posses at the time of marriage and specify the respective property rights they will enjoy during marriage and the intended disposition of assets in the event of a divorce or separation. Despite what you’ve heard, a prenup is not exclusively for the wealthy. When properly drawn, it can prove valuable to persons of modest means. However, proper drafting is the key to its use. Generally, state law governs enforceability, so the contract must be drafted by a competent attorney to insure interpretation is as intended. Once in place, the newlyweds may proceed with their lives, secure in the knowledge that any future marital difficulty will not carry with it the seeds of financial ruin.
A final comment is in order…
With these three potential cataclysms—illness, job loss, and marital breakup—minimized, pure chance becomes less a factor in your prosperity. Now you need only concentrate on conducting your financial life sensibly. Good luck and smooth sailing.