If 2020 taught us nothing else, it’s that extremely challenging events can show up with little or no warning, and financial hard times are something many of us may have to face in the future.
In this week’s episode of the rich & REGULAR podcast, we talk about ways to prepare for the worst. Check it out.
Visualize your worst-case scenario and then learn from it.
Everyone has been in a difficult financial place at one point or another in their lives. It’s difficult to pull yourself up and out after losing your job or having your investments take a serious hit. Very often, we’re told to “think positive,” which usually means pushing aside any fear or negative emotions with a Pollyanna-ish positivity that doesn’t leave room for the reality of a situation.
Instead, think “practically pessimistic,” and sit with those negative emotions. When we get curious about fear and anxiety, and think through a situation we would rather avoid, we learn we can get through it, even if it will be challenging. Making a plan before you need it is a great way to develop a strategy that allows you to navigate difficult times.
Take time as part of your weekly or monthly budget review to think about your worst-case possibilities and visualize each potential difficulty in your head to get used to the idea of change. Be detailed in walking through the problem, experiencing each emotion that comes up, and seeing the possibilities with a calm mind.
Review your budget and plan.
Knowing how much you spend and determining the order and places you will cut can help you prepare for the worst. You don’t have to make these changes right now, but knowing where you would start can lessen your anxiety of the future and let you take quick action to stem any financial leaks if the worst happens.
Review: Start by reviewing your budget and tracking your spending for a couple of months. This will give you a big-picture overview of your situation. Once you have a good idea of what you’re spending, consider what you would cut if your income disappeared.
Assign priorities: Give each category in your budget a priority ranking so that you know when and how to make cuts. You can make your categories as general or detailed as you want, but assign every spending category in your budget a priority so you can cut things swiftly if/when needed. Pay attention to any emotions or knee-jerk reactions that come up as you consider your list, as those feelings can help you determine your priorities.
- Priority One should be necessities like your rent or mortgage, basic food, medications, essential utilities, and a basic cell phone plan.
- Priority Two may cover transportation—whether that’s your car, a bus pass or used bicycle to help you search for a new job, as well as gas money, insurance and other important but not necessarily essential items, like home internet service.
- Priority Three are all the extra wants in our budgets, such as going out to eat, subscription services or monthly memberships. Priority three items are often the first things to be cut when we hit a rough patch, so identifying what those are beforehand can be a great relief in times of stress.
Challenge yourself to increase your emergency fund.
Once you’ve determined where you can cut items from your budget, challenge yourself to see how much money you can save in any given category. Focus on cutting down one of your budget categories to the bare essentials just for a week—or maybe a month if you want a real challenge—and see how much you can add to your emergency fund.
For example, challenge your partner to a no-discretionary-spending month to see who can save the most money, or cancel your Netflix or Hulu subscription for a month to see what going without TV teaches you about yourself. You might find that you spend a lot of time in front of a screen instead of working on the goals you want to accomplish.
These savings might be relatively small, but this exercise allows you to practice living without something you currently consider essential and add a little extra to the emergency fund at the same time. Make a game of it now so if something terrible happens, you know these changes aren’t the end of the world.
Pay off debt.
One of the best ways to future-proof your life is to get rid of debt as quickly as possible. Once you have a solid emergency fund to help you out when the car breaks down or the dog gets sick, paying off your debt should be next on your financial priority list.
Start with the highest interest rate debt first, like credit cards, car payments and personal loans. Then you can move on to conquering student loans and mortgages. The internet is full of debt reduction techniques, so do your research and find one that works for you.
Hopefully, you don’t have too much consumer debt to pay down, but if you do, don’t despair. Find a realistic plan you can stick to and commit. Just taking action toward getting rid of your debt will help you feel more in control of your situation.
Preparing for the worst-case scenario can seem like it’s just inviting trouble into our lives. Still, planning and preparing now can make a highly stressful situation more manageable. The looming shadow of job loss or economic hardship is not fun to contemplate, but by considering what that would look like, you can soften much of the pain of the actual situation and be ready to face it with a plan in place.