If one of life's crises were to come your way, would you be prepared? I'm talking the big ones, the disasters we're all afraid of: divorce, death of a spouse, disability, job loss.
Although there are clearly emotional sides to every one of these, I'm actually focusing on financial preparedness. A recent survey by AARP Financial found that while 60 percent of Americans between the ages of 40 and 79 have experienced a life crisis, many of us are simply not prepared.
In fact, 51 percent of people surveyed say that they are unprepared to deal with the financial impact of a job loss. Forty-four percent say the same about a serious illness or disability of a spouse, and 35 percent are unprepared to handle a divorce.
Part of the reason, to be sure, is that on a superstitious level, we're afraid that preparing for these kinds of things will end up making them happen. Acknowledging the possibility makes it real. In our minds, it makes sense, but on paper, doesn't it sound downright silly?
Fortunately, we have the means to change this attitude. Let's go through each scenario one by one -- starting with job loss, the one that is on the top of everyone's minds these days -- and develop plans to get you prepared.
-- Job loss. No doubt there are people reading this right now who have already lost their jobs. If you're lucky enough to still have yours, you probably have friends or relatives who aren't. So first thing's first: You need emergency savings of at least six months' worth of living expenses. It seems like I've said it a million times lately, but it's certainly worth repeating. Also, keep your eyes peeled at work, says Mac Hisey, president of AARP Financial. "Find out how your business is doing. Are you losing customers? Are sales or revenues down? Are you starting to see strain in your boss or the top people in the firm? Those are very concrete things that can help you understand if your business is holding up well in this recession or not."
This is a time to be proactive. Make yourself indispensable at work, and outside of work, get back into networking to build up your contacts. Update your resume and start brainstorming what you'd do to generate an income in the event of a layoff. Pick up a side job if you can -- the extra income certainly won't hurt.
-- Disability. Insurance is the number one way to prepare for this, and making sure you are covered is key. Many employers provide policies that will replace about 60 percent of your income, up to a certain cap, says Chuck Roberson, a certified financial planner in New Jersey. Often, that's not good enough. "You can do a very simple check by figuring out how much money you made last year, subtracting how much you saved, and dividing the difference by 12. That's how much you spent each month. Then look at your benefits and see what they provide." If you come up short, first look at what you can cut back on -- in many cases, for instance, gas for the car can be automatically reduced because you won't be shuttling back and forth from work. If it's still not enough, you can buy an additional 5 or 10 percent from your group benefit plan or purchase supplemental insurance to fill in the blanks. Don't skimp here, because your income is very likely your largest asset.
-- Divorce. No one anticipates divorce when they're walking down the aisle, and when it happens, it can be devastating, both personally and financially. To ease the financial side of the blow, you need to maintain your monetary identity in your relationship; that means having your own credit history and savings accounts, retirement and otherwise. I advocate for having your own checking account as well, in addition to a shared account for household expenses. "In a lot of relationships, one party, whether it's the husband or wife, typically runs the finances. But both need to have access and understand what's happening," says Roberson. My suggestion? You should organize monthly, if not weekly meetings, during which you can talk about your finances, your goals and any progress reaching them, and where you both stand with debt. You should also each have a copy of all shared account numbers and passwords.
-- Death of a spouse. In addition to the suggestions above -- which are applicable in both divorce and death -- you and your spouse both need to have a will in place, as well as a living will and durable power of attorney. Know where copies of your partner's paperwork are kept, so you can find it when necessary. Know how to reach out to the people you're going to need to contact, including your partner's employer, bank, lender, insurance providers and lawyer. And if you have children or others who are relying on your income, you should have life insurance in the event of your death. Term policies are very cheap right now, and you can buy them long-term. So if your children are toddlers, you could get a 20-year term to get them through college. If they're teenagers, ten years will likely suffice.
In all of these instances, if you need professional help, don't be afraid to look for it. AARP Financial's survey found that the majority of people turn to family or friends for advice in these situations, which is great for moral support, but not necessarily for financial advice. Don't make any major decisions until you've thought them through completely, and if that means paying for a session with a financial adviser, it's likely worth the cost. You can find advisors who charge by the hour through the Garrett Planning Network at www.garrettplanning.com.