Needless to say we were all relieved to hear that a government shutdown was avoided late on Friday. Here in Maryland — and particularly in Howard County — the economic stability of our community would have been shaken to the core if there were a prolonged standoff. Just look around at your own friends and neighbors to count the number who are federal employees, contractors, or receive services that might be affected. How well would they (or you) be able to withstand a period of time without pay? And that got us to thinking… What can you do to be ready?
Far too many don’t. (Or don’t have nearly enough.) The standard for emergency savings used to be 3-6 months of expenses. These days the recommendation is to have at least six months. Unfortunately, this typically means finding a way to accumulate tens of thousands of dollars — a daunting task to say the least. But in the end, finding a way to start funding your savings for emergencies will likely mean the difference for your ability to successfully withstand crisis. Start small and start today. Ask your employer if you can direct deposit into two accounts. Then, open a small savings account and begin allocating 5-10% of your take home pay into this account. For most folks, putting the money directly into the separate savings account is an easy way to save — and most find they don’t even miss the money!
Pay down your debts!
You’ve got some credit cards with a big balance, right? But, you pay at least the minimum every month and you pay on time — so no dings on the credit report. So what’s the big deal? Well — besides the obvious money flying out the door toward interest on the debt — there’s another, even greater risk. By maxing out on the cards, you don’t leave yourself any cushion to use the cards in times of crisis. That’s right — if you have a sudden loss of income, you’re going to need to be able to use those cards without going over the limit to pay for necessities like food and fuel. The rule of thumb says you should never carry a balance more than 30% of your available credit. And, although we always suggest limiting the number of credit cards you carry, it’s probably better to spread your balances out over a couple of cards — even if it means having 1-2 extra accounts. The key is to avoid the temptation to spend the extra cards up to the limit.
Don’t be fooled when they say… “You CAN afford this…”
Whether it’s a house, or a car — or any big purchase you borrow for — recognize those tricky words. Just because you CAN afford it, doesn’t mean you SHOULD buy it. Your house payment shouldn’t be more than 30% of your take home pay. (And, perhaps only 30% of the net income of just one of the earners in the house for extra security.) Your total transportation costs (car payment, plus gas and maintenance) shouldn’t be more than 12-15%. The housing costs are particularly tough in Howard County — but keeping the guideline in mind will help you shop smarter.
During times of crisis you may be eligible for deferment of your student loan. Contact the lender who holds the loan to inquire. This should only be undertaken for short periods of time. According to FinAid, deferring a student loan for 3 years, doubles the cost of the loan — so this should only be a short, stop-gap measure. It is, however, critical that you not just ignore your student loans in times of crisis. Student loan debt appears on your credit report and will stick with you forever — it’s one of a just a few types of debts that even bankruptcy will not dissolve.
This is probably the toughest one for most people. Go through your monthly expenses and write them down — ALL OF THEM! Then, multiply them to see how much you are spending on the little stuff over the course of a year. This may be just the reality check you need. How much of your money is going to Comcast or Verizon? How much is going to Starbucks or Panera? Once you add all this up — you may find that the $5,000 a year you are paying for TV’s and phones just isn’t worth it. Are you really creating fulfillment for you and your family with the choices you are making?
While it’s great to start taking action to prepare for a crisis today. Chances are you’ll not only sleep better at night knowing you have a solid plan in place to deal with emergencies, but you may make different choices that make the days more enjoyable too. And, the next time Congress decides to play political badminton your paycheck — and we know they will — you’ll be ready.