When we start with a software project, we have a plan developed and well documented. We also have a backup plan for the original one, called as fall-back option. The backup plan is not documented as detailed as the main plan though, still we have plan B!
Applying the same project management method to our personal finances, should we not have a financial backup plan? What if there’s a new family member, what if we lose some one? What if a disaster strikes? Or even what is our plan if another economic melt down occur today? To meet with any unavoidable circumstances that may affect our financial life and health, we should be ready with a backup plan, the plan B.
Let’s say you have a goal for mortgage pay off in 10 years, and suddenly due to illness to one of your family members, you need large chunk of cash even after insurance coverage. In all probability the money you will either take away from emergency cash or you will break in to another investment and do a premature withdrawal (may even be from your retirement saving). Worst case, you will borrow money with interest.
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Now what’ll happen to your plan A, to pay off mortgage in 10 years? Considering you borrowed money or delved in to emergency cash to pay for immediate need.
Your kids’ education might be dependent on completion of this plan to pay off mortgage in 10 years. So what will happen to your kid’s education?
What’ll happen if you borrow from retirement saving?
If your plan to retire at age 60 was dependent on a targeted size of your nest egg, you not only have to repay the loan but also you have to work for few more years to build the nest egg size as per your original plan.
I admit I don’t have a plan B as yet. But shouldn’t I create one? Let’s first look at various life changes that may derail your main financial plan
Your personal financial plan would be derailed due to
- Death of primary or one of the bread winners – Need less to say this one event can take you from home to street. Did you check the nomination and beneficiary info of your working spouse’s investments. Do you know if the primary bread winner has sufficient life insurance coverage?
- Job loss – This one I have lived through, and I thought I had a plan, but believe me, it was not in enough detail, and the more you plan, or think about this, the less gut wrenching it can be if it happens to you (or your spouse). I assumed I was going to get a “settlement” for getting laid off, which I did, but folks who got hit a month after I did, ended up with nothing, and those folks really were in deep trouble, can you deal with that kind of disaster?
- Economic slowdown – Remember what happened in 2008? 1000’s of people went job less, more than a million saw their investment values depleted to more than a quarter of its original value. Are you prepared to tackle with something similar when it happens again?
- Severe illness – Illnesses that take away ability to work is a serious threat to your ability to manage finances. When you can’t work to earn the living you need to have protection against disability.
- Divorce – Divorce can spell a financial doom for either parties. It’s better that you both understand your families finances, investments and checking account details
- Law suits – This is another trigger for financial failures, specially if your profession attracts law suits, any financial ruling against you could ruin your life long savings and other assets.
How the backup plan should look like
Back up financial plans should center around insurance, beneficiary, nominee and alternative investment or saving options. An ideal and full proof backup plan should also consider option for alternate employment in case of job loss. Most importantly, backup financial plan should be in writing.
(Related – How to prevent a financial disaster)
In computer document or on a piece of paper, write down the various financial disorders that you may face (like the one I listed above). Then write down the backup plan against each of such items. Make sure you have insurance coverage that can cover your self, your family, your vehicles and your health.
Do try to remember or memorize your insurance coverage information as much as you can. You don’t have to remember the co pay amount when you order a new pair of glasses, but you’d do a ton of good if you try to remember the yearly out of pocket maximum your health insurance requires or the absolute max limit of your flood insurance coverage.
Such coverage changes every year, so either you re memorize the updated numbers or try to store such important coverage information at a central and easily accessible place. When in dire need, we tend to forget the essentials.
(See also - 5 Steps to fix financial failures)
Talk to your financial planner on your emergency fund need, talk to your lawyer and discuss the possibility of a law suit against you, check if your professional insurance is sufficient. Talk to experts and determine your bail out options, chalk out alternative housing arrangement plan in case of a natural calamity.
Your financial planner and investment advisors should be able to tell you about alternate investment options and the nature of your investment liquidity, in case you need cash urgently.
Be updated with what’s happening around you, at your work and in the economy. Always up-skill yourself, have a strong network of friends and well wishers. Create and maintain strong contact, you never know when someone might be of help when you are looking for a job!
Lastly and most importantly, talk to you partner and other family members and make them aware of your alternative financial plan.
Readers, do you have your financial backup plan? If not, try to have one as early as possible.