How To Prevent A Financial Disaster

A financial disaster, as the name suggests, is a calamity. It is probably less predictable than a natural disaster. Financial disaster can ruin your life, your career and your future.

What conditions can be classified as a financial disaster?

A sudden drop of your net worth is a financial disaster. A loss of job and no cash in your bank is a financial disaster. But, most Americans suffer a financial disaster on account of huge debt on their loans and credit cards. An equally good number suffer it on account of health related issues. A theft or burglary can also cause a disaster. A natural disaster can also cause a financial disaster.

A sudden or gradual decay of your wealth or worsening of financial health is what experts say, a financial disaster.

What is financial health

The balance between your current and future desires and your spending ability is what determines your financial health. It is essential to find common financial problems that you may face and plan for them so that you sidestep potential financial crises.

Does this mean that you give up today’s enjoyment for tomorrow’s security? Certainly not. It just means that you take a realistic view of your circumstances and decide upon spending limits giving due consideration to your needs and your income, and accommodating your desires to a certain extent. This also means you are covered when circumstances beyond your control happens. Preventing financial disaster is to understand this might happen to any body and everybody, most of the time without any alarm.

So, we all should be ready to deal with it with arms and ammunition and prevent it from coming anywhere close to you. Let’s battle against a financial disaster.

Change Spending habit

• Draw up a priority list for expenses, make a budget that will accommodate both needs and reasonable desires and spend accordingly. You should also plan for emergencies, and invest in proportion to your income.

• As far as expenses go, you should be level-headed while spending. Limit your credit card use, if you are not set up with auto pay. It is easy to indulge oneself buying stuff with a credit card, but do spare a thought for the bill that will reach you later. Control over credit card usage can make a huge difference in personal finance.
• Discard the ‘spend now, pay later’ concept from your life. This will give you a realistic view of your spending abilities. The peace gained from a debt-free situation is sure to outweigh any disappointment that you feel from not having indulged all your spending limits later.

4 insurances you should have

1. Life Insurance. You and your family depends on you. How much are they prepared if you do not exist tomorrow? Not an easy one to answer, insurance providers have their own calculators which varies a lot.

I am insured up to 8 times my annual gross income. I have life insurance for my wife as well. You should consult with a specialist to come up with your coverage, this is very important step you should take immediately if you are not yet covered.

I do not have term insurances, it is not for me, I will explain this in my future blog post. You apply your own judgment. If you have some known major illness, you can opt for high risk life insurance.

2. Auto Insurance. Driving without insurance is a crime. You’ll set yourself on a clear path to bankruptcy without coverage if your unintentional actions behind the wheel cause injury or death to another human being.  Causing property damage with your vehicle could also land you in jail if you don’t have auto insurance.

3. Home owners/Renters Insurance. You need to protect yourself from natural disaster, theft, vandalism. Your home, beside your family, is your biggest asset. Do you have a friend suffered a hurricane, tornado or flood in recent years? I love to read any such reader’s comment here. Let’s hear the answer directly from them as to why you need this insurance.

4. Health Insurance. In third world countries, they mostly do not have comprehensive health insurance, it’s true though, that health care cost is low and people pay from their pockets for medicines and doctor visits in those countries, but still when a significant illness occurs, people get broke. I literally seen that happening.

This is a financial disaster, that every American should try to prevent. In America health care costs are too high, you got to have a health insurance. Understand your coverage, have out of pocket maximum in your checking account. Lastly, a little out of topic, do not forget to carry your insurance card with you all the time.

Don’t put all eggs in one nest

Do not put all your money in one stock or one fund. As a thumb rule, experts say, you should not put more than 10% of you saving in to a single stock or fund. I personally follow 5% rule. Diversity is the mantra every one should have.

Ask the people who bought Lehman or Washington mutual shares,  I know a close individual, who kept on buying WaMu shares as it plunged downwards, thinking a big bank can not fail, suddenly his $15k just vanished. Now, that is a financial disaster.

Take time to look at your 401K plan. Each targeted fund you invest in, comprises of several funds. If you are an independent investor, who do not take advice from experts, use your fund account’s feature. I often use Fidelity and TD Ameritrade’s portfolio analysis tools, which are free and easy to set up, they will flag if any risk is there in your investment pattern.

After reading this blog, do spend some time trying portfolio analysis tools your broker or fund manager offers online.

Work hard, Earn More

Constantly look out for jobs, assess your skills and the market rate for the same skill and experience level. There might be one job which will give you more satisfaction and fatter package. If your current job gives you peace of mind and all that you need, look for ways to get better salary increment.

Once you starts earning more, look out for newer avenues to invest your extra money. Of-course, you want to step up your life style too, nothing wrong in it, but, see to it that you are saving a very good part of the increase.

Couple of questions for you now, in answers lie your readiness for potential disaster.

1. What have you done so far to lower the financial risks in your life?
2. Do your insurance policies cover enough to save you from going broke, or for that matter, your family? your life?

Readers how prepare are you?