If you faced a life crisis, would your finances survive the turmoil? Unfortunately, most people are not prepared for the financial trauma a life emergency can create.
Take Tom and Sue Smith for example. Tom, the owner of a deli, was diagnosed with cancer shortly after his 64th birthday. Three months later, he was dead. Sadly, Sue didn't have much time to grieve over the loss of her husband-she was too busy scrambling to find the money to save his business from bankruptcy. Sue struggled to keep the business running for another year until she was finally able to sell the deli.
Each year, millions of Americans have their lives turned upside down by ill-fated events-whether it's the death of a spouse, an illness in the family, job loss, divorce or disability. Unfortunately, many of these people suffer even more because the crisis puts their finances in such a precarious position. They struggle to pay their mortgage and the bills and they often end up draining their retirement accounts.
The shocking statistics
In today's tumultuous economy, countless families are facing diminishing home equity and the threat of a job loss, and soon-to-be retirees are watching their nest eggs dwindle. However, most people are simply not prepared financially for a life crisis-at least according to a new survey sponsored by AARP Financial. This survey of adults ages 40 through 79 examines how well people prepare for life emergencies-and the results are eye-opening.
Two out of every five participants say they would be scrambling for cash if they were blindsided by an emergency. Among those who have had life crises, 40 percent say they were not prepared financially. Out of those who have lost a job at some point, only 12 percent say they were ready for the change, and 44 percent were angry at themselves for not being better prepared. And the odds of facing an emergency are surprisingly high-57 percent of those surveyed have been through at least one life crisis.
Considering the stats, we will all most likely face a life crisis at some point-which means you simply cannot afford to be unprepared. So, how do you get financially ready for these kinds of emergencies? Here are five preparation tips:
Tip #1: Expect the worst and hope for the best
No one enjoys thinking about the possibility of becoming sick or losing their job or spouse. But if you want to be prepared, you have to expect the worst and hope for the best. Some financial experts say a good way to plan for a life crisis is to figure out how you would live off just half of your current income. While that may be a frightening thought, it may become necessary if the heat of a crisis.
Tip #2: Start saving
The best way to prepare for a financial crisis is to build a safety net-in the form of an emergency fund. Without an emergency fund, many people end up dipping into their retirement accounts during a life crisis. Before long, their nest egg has disappeared.
The amount of money you should have in your emergency fund depends on your unique situation. Most financial experts say you should keep between three and six months worth of living expenses in your fund. Set realistic goals and start small. Even if you put just $10 to $30 aside each week, you'll slowly build up a suitable emergency fund.
Tip #3: Purchase disability insurance
According to AARP Financial's survey, 84 percent of people under 60 have life insurance, but only two-thirds have disability coverage. Seeing as major illness or disability is the number two most common cause for financial hardship, you are taking a huge risk if you don't have disability insurance.
Although you may have disability insurance through your employer, be sure to read the fine print. It may not be enough to cover your expenses if you were to become sick or disabled-which means you may need to purchase supplemental insurance.
Tip #4: Manage your finances together
If just one spouse makes all the money and all the money decisions, this can lead to problems. Many financial experts recommend that married couples take equal part in managing the finances-especially if one spouse is the primary breadwinner. Not only will this allow you to budget and invest wisely, but it will also teach you to not fight about money.
Plus, if you end up getting a divorce, you'll already be accustomed to sharing money decisions-which means you'll have the skills you need to compromise and avoid unnecessary drama.
Tip #5: Act quickly
Most life crises come without warning. That means you should be prepared to take action at a moment's notice. Most people tend to freeze up when they face an emergency. However, experts say that you'll be more likely to survive a crisis if you take action as soon as possible.
When you're in the trenches of financial distress, you can't worry too much about what tomorrow will bring-this will just paralyze you with fear. Try to live in the present and make the wisest financial decisions you can today. Take things one day at a time, and remember that this too shall pass.
Above all else, don't be afraid to ask for help. Most people who have faced financial crises say their family and friends helped them through it and offered them the most valuable advice. Remember, you are not alone in this-whether you turn to a sister, a cousin or a trusted financial advisor, be sure to ask someone for guidance.
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