How To Be Financially Prepared For The Loss Of Income
This article was written by Teri Tornroos, a Fee-Only Financial and Tax Advisor with Evergreen Financial Planning. Teri is a featured financial advisor in Boomerater's Marietta financial advisor directory.
Here are some tips to help you be financially prepared for the possible loss of your job:
Make sure you have an Emergency Fund
Especially now with unemployment rising, it is good to have 3-6 months of cash available. Your emergency fund should be able to cover necessary living expenses such as mortgage, utilities, food etc. The rule of thumb is 3 months worth of expenses if you have two income earners and 6 months if there is only one income earner. The purpose of an emergency fund is to help you through those difficult times, such as illness or job loss, without having to dip into retirement accounts or taking out loans. An emergency fund should be in an easily accessible account but one that you only dip into in case of emergencies!
Spend less than you make and save as much as you can
It sounds almost too simple, but not enough of us do it. Make sure you are not making any unnecessary purchases and building up any debt. And by all means continue to contribute what you can to your 401K, even if your employer is not matching the amount you save. You'll still benefit by reducing your taxable income, while adding to your retirement account. However, if you do not have your emergency fund established, that is a priority and you may need to temporarily reduce your retirement savings until your emergency fund is in place.
Put together a budget
Now is a great time to track your expenses. Look back over the last few months. What are your necessary expenses vs. your discretionary expenses? Seeing where your money is going helps us to be more disciplined in our spending! Make sure you are paying yourself first. This is money for your emergency fund and your retirement fund.
Use credit cards wisely
Pay them off every month. Use them to take advantage of the cash back, not to use them as a loan. You want to make sure you aren't carrying a balance from month to month, and are paying down any balances you may have. If you do have a balance, call the company that issued the card. You may be able to get it reduced. The high interest rates charged on credit cards are one of the worst ways for expenses to get out of control.
Review and rebalance your portfolio
With the changes in the market in the last year, most portfolios are no longer in proper balance. Having a balanced portfolio helps to minimize risk and maximize return. Your balance will depend on your age, risk tolerance, number of years until retirement, and current financial situation. The goal is to reduce risk (chance of losing money) through diversification, while increasing your return. A very rough rule of thumb is to have your fixed income percentage equal to your age. Fixed income investments include bonds or preferred stocks. They produce a regular or "fixed" amount of return. The rest of your portfolio should be diversified in equities (stock) using low expense index funds.
Are you looking for a financial advisor?Teri Tornroos will provide you with a free initial consultation to discuss your financial needs. Please visit Teri Tornroos's financial advisor profile to contact her directly. She is a Marietta GA financial advisor.