I can’t think of one family that has not gone through both lean and fat times.
When the income stream dries up, this strains both the fiscal and emotional health of all members of your family. This is true especially for one-income households in which the other parent stays home with the kids.
And, unexpected expenses crop up for any family, such as your daughter needing braces, your son breaking a leg at football practice, the family car having a cracked head gasket, the stove breaking down, you find you are pregnant (again!). Finding the funds to pay for things outside the regular household budget is equally stressful.
Is your family prepared to cope?
I am talking about coping both financially and emotionally because the two are intertwined, meaning, if your family has not planned adequately for sudden loss of income or unexpected expenditures, it will cause stress for everyone.
I spoke with three prominent attorneys in the Philadelphia and North Jersey area about what they see their clients going through and how those clients not only survive, but thrive under these circumstances. Here are their top three strategies for preparing for financial emergencies.
1. Families Should Live Below Their Means.
Everyone knows what it means to live within their means, but what in the world is living below your means?
Living below your means is a way to make sure your family’s necessary expenses are covered and that there is something extra for both savings and for the occasional splurge. Few things are as stressful as working and working and working, only to have nothing to show for it but the bare necessities.
DO NOT spend your entire income on the bare necessities. Subsistence living is not living at all – families need to feel they have both the opportunity to indulge in a few “wants” and also that they have a financial cushion to fall back on if necessary.
You can’t beat that feeling of financial security, but to get to that feeling requires some thought and planning. Committing to living below your means is the first step in that plan.
The Family Budget
Families especially must have a budget because there are several people affected and, if you will, several moving parts. Each family member has differing needs, wants, and goals, and is an entity to whom things happen that require money.
The first step in creating a household budget is to use receipts and bills to calculate your basic monthly household expenses. These expenses should include mortgage or rent, utilities, transportation, food, medical insurance and care, and sundries. You can just write them down on scratch paper, or make a spreadsheet.
Add up all of your family’s monthly expenses – does your current income cover that amount, plus some?
Please don’t feel bad if your answer is no. Folks who have never used a budget are often appalled the first time they see how much they spend each month, and on what, recorded on paper in black and white. It is sort of like going to your favorite restaurant, looking at the menu to find your favorite entree only to see that they have printed the calories next to it and it has 75% of your daily calories! Ouch!
Reducing Household Expenses
If having calculated your family’s monthly expenses you are shocked, that is understandable. Luckily there are some easy ways to cut household spending:
Enroll in a family cel phone plan and/or change carriers to one that’s less expensive
And sometimes just being tasked with watching where your money goes each month is all you need to rein spending in.
Pro Tip: Pay all of your bills on time. You will find your credit score will improve, and if you ever need a mortgage or car loan you will be eligible for a better interest rate.
2. Families Must Wean Off Credit Cards.
As they say, make hay while the sun shines. While your financial situation is stable you should be paying down your credit card debt and refraining from spending up your credit cards, says David M. Offen, Esq., a bankruptcy lawyer in Philadelphia. If you are not paying off your credit cards in full every month, you are bleeding money in interest charges. That is completely unnecessary and a waste of the income you work so hard to earn, says David.
If you have more than one credit card, pay off the card that has the highest interest rate first, meanwhile paying the minimum on the other cards. When the highest interest rate card is paid off, pay off the next highest, etc. This might take some time – be patient. Eventually all of the cards will be paid off.
Pro Tip: As you pay down your credit card debt you will notice that your credit score improves. This is because your debt-to-income ratio improved! Good for you!
If when you look at your budget and find that you habitually use credit cards for your family’s necessary living expenses, then your family has been living beyond your means. If this is the case, ask yourself – if you didn’t have those credit cards bills to pay each month, could your family live on your income? If your answer is yes, you might consider filing for bankruptcy protection and getting that debt discharged. If your answer is no, you need to increase income, decrease spending, or probably some combination of both.
Pro Tip: While bankruptcy can stay on a debtor’s credit report for up to ten years, after the bankruptcy case closes many debtors find that their credit score improves because their credit card debt was discharged, and their debt-to-income ratio improved!
3. Families Must Protect Their Income Stream.
Everyone knows that a family needs an emergency fund. But how much should be in that fund? Noted financial expert Suze Orman suggests that eight months’ worth of expenses is what a family needs these days. Here is her excellent article about managing family finances.
Eight months’ income may seem like a lot, but don’t get overwhelmed – savings start bit by bit and accrue over time.
Some Simple Saving Strategies
Save 10% of each paycheck
The Highest Earner in the Family Should Obtain Life Insurance
In case the unthinkable happens, the primary breadwinner needs to provide a safety net for the family. This should take the form of a life insurance policy, says Chad G. Boonswang, Esq., a busy life insurance beneficiary lawyer in Philadelphia. Chad says that protecting the income stream is the most common reason people take out life insurance.
Family law attorney Katherine K. Wagner, Esq. advises that if the parents are divorced, both the person paying support AND the person who has custody of the children should obtain life insurance. That way the family is financially protected if anything happens to either parent.
In short, by establishing a family budget, paying off credit card debt and weaning off the use of credit cards, saving, and purchasing life insurance, your family will be prepared for any financial contingency and avoid the stress of financial hardship. Best of luck!