September 2002
What Color Is Your Safety Net?
Amy E. Gibb, MBA, CFP
You are standing on a narrow Tight Rope, the balance bar grasped tightly in your hands. Far below are sharp rocks and a raging river, black and forbidding. The rope is narrow and swings in the wind. One missed step and it is all over.
Do you sometimes feel as if you are walking a Financial Tight Rope with blackness below you? As long as you keep your eyes straight ahead and nothing goes wrong, you can stay on the narrow rope, but one missed step, a strong wind or a miscalculation and you face financial disaster below in the dark. Wouldn't you be happier you had a rainbow of safety nets to catch you?
Everyone is at risk of falling off the Financial Tight Rope. We lose a job,
quit, or get laid off, marry or divorce, move or have children, become ill or
change careers, go back to school, buy a new house or lose money on an investment,
spend to much and find your debt out of control. The difference between those
who fall off and recover and those who do not is Financial Safety Nets.
Everyone needs a rainbow of Financial Safety Nets to catch them if they
falloff the Financial Tight Rope. These Nets are represented by such financial
tool as Cash, Insurance, Investments, Low Debt,
and Lines of Credit.
The first and most important Safety Net is CASH. Cash savings will help you pay for unexpected expenses or to survive unexpected changes in your income. You build this safety net by spending less than you earn and saving money every month.
Start by saving 10% of your take home pay to build your CASH Safety Net. If you bring home $3,000 a month, you should save $300 per month for emergencies. Some use tax refund or bonus checks to grow this account. You should work to accumulate cash and savings for 3 to 6 months of expenditures. For example, if it costs $3,000 a month to pay all your bills, then you need $9,000 to $18,000 in savings in the bank for your Cash Safety Net. For many people, it takes several years to build this net. This money is allocated for emergencies, a lost job, illness or another dire situation. It is not intended for a vacation or a new car.
The second Safety Net is INSURANCE, including life, disability, health, and long term care insurance. Consider the effect on your family if you were unable to earn a living or care for them or care for yourself. In many cases, a serious disability can be the greatest financial disaster a family can face.
To build your INSURANCE Safety Net, meet with your insurance provider and financial advisor. Discuss the costs and benefits of all types of insurance coverage. Choose carefully the level of coverage that provides you protection within a budget you can afford. Consider buying insurance for any event that you cannot afford to pay for from your savings or by changing your life style.
A third Safety Net will be your non-retirement INVESTMENTS. Your Investment Safety Net might include mutual funds, stocks, bonds, CD's or equity in a rental property. For tax and long-term strategy reasons, you may not wish to liquidate these holdings unless the situation is dire, however they do represent another level of safety for you and your family.
The fourth, and often overlooked Safety Net is LOW or NO monthly DEBT payments. Often in a financial crisis, the force that pushes us off the rope is large debt payments. Without debt payments, we will not be faced with repossession or eviction. Hand in hand with this safety net is your ability and willingness to drastically CUT your EXPENSES when you are faced with a financial crisis. You must be prepared to cut any purchases or expenditures that in not absolutely essential. Eating out, entertainment, cable, and clothing all fall into this category. Is very easy to reestablish your previous life style at a later date, but impossible to get back money that is already spent.
The fifth Safety Net is Pre-Approved and unused LINES OF CREDIT. In the event that your cash reserves are not adequate to cover emergencies, a pre-approved line of credit will allow you to borrow money to cover your expenses in the short run. The most attractive type of financing is generally a home equity line of credit. The rates are attractive, credit limits high and there are tax advantages. One reason to get your lines of credit in place before you need them is if a financial emergency is due to job loss, it is difficult to qualify for debt when you have no income.
Other Financial Safety Nets include; Multiple and Flexible Income Sources, Good Credit and Family Members. Job loss is less financial devastating to a family that has more than one wage earner and when workers have multiple and updated skills. A good credit score allows you to access credit at attractive rates. And finally, don't overlook the ability to borrow money from family members. Start now to build trust and respect with your family related to your financial dealings. Relatives are much more likely to lend you money if they trust and respect you. If you are faced with borrowing money from family, sign a promissory note, pay interest, make payments promptly and offer collateral such as car titles.
So what color is your safety net? If you think of each of the five nets as
a color, Red, Blue, Green, Yellow, and Purple you will see that when seen in
combination they provide a rainbow of alternatives for the financially prepared.
Amy E. Gibb, MBA, CFP
President
Money $ense
Amy@MoneySenseSolutions.com, www.MoneySenseSolutions.com
303.494.5362
Financial Advising for individuals and business owners
"Money isn’t everything, Managing it is"
Amy E. Gibb, President of Money $ense specializes in Bookkeeping Services and Financial Advising for small businesses and individuals. She may be contacted at 303.494.5362, or for more information go to www.MoneySenseSolutions.com.