There’s one truth I’ve learned from 20 years of personal-finance reporting: People rarely seek advice about their money on a whim. They ask for help because something bad happened. They lost a job. A spouse or child is very ill. They’re getting divorced. Eventually, the emergency passes or becomes a fact of life, and the person swears, “Next time I’m going to be better prepared.”
That’s a line I hear most often from women, who are hit hard by such life crises. A recent survey shows that the loss of a spouse had a very significant financial impact on 46 percent of women but only 17 percent of men. Loss of a job had a very significant impact on 66 percent of women but only 49 percent of men. Trying to manage on the fly just doesn’t work, because when we’re in the middle of it all, we’re too fraught to make the right decisions. “Often a need for urgent financial decisions meets an emotional hurricane,” says Richard Hisey, president of AARP Funds. So what can you do to protect your finances before the worst happens?
You Lose Your Job
Today an average of 55,000 people are laid off every month, and while state unemployment benefits typically last 26 weeks, the average worker is out of a job for a record 35.2 weeks. That’s why I now advocate a larger than usual emergency cushion of nine to 12 months of living expenses, liquid and available in a money market or high-interest savings account. (To find the best savings rates nationwide, go to bankrate.com.)
If you suspect a layoff is coming, explore loan sources. The idea is for you to open a credit line while you’re still employed and able to qualify for a loan. “It’s not that you want to accumulate debt,” says financial planner Jackie Goldstick of Palm Beach Gardens, Florida, “but this will provide liquidity if you need it, in case of an emergency.” One possibility is a home-equity line of credit (HELOC). Most lenders today won’t allow you to borrow more than 80 percent of the value of your home, so to qualify for a home-equity loan or line, you need to have at least 20 percent equity. Some benefits of HELOCs: There may be no closing costs (though there is sometimes a small fee—$50 to $100—for each year the line is open), and you might not pay any interest if you end up not using the money.
Lastly, make sure no more than 10 percent of your assets are tied up in the stock of the business you work for. When a company has mass layoffs, chances are it has fallen on hard times—and you could see your retirement stash vanish right along with your paycheck.
Your Partner Dies
The main way to protect yourself in this case is with adequate life insurance, but how much should you buy? If a couple needs two incomes to pay the mortgage, then both partners should be insured. And if a caregiver would have to be hired for the kids in the event that a stay-at-home spouse died, the life of that stay-at-home spouse should be covered, too. Run the following calculations: First, figure out how much your family needs to live on each year. Then subtract the money you earn yourself. What’s left is how much extra you’d require annually if your spouse were to die. Multiply that amount by the number of years you expect to have the same financial obligations (for example, until you finish paying off your mortgage, or until Social Security kicks in, or maybe forever). The shortfall is what you need to cover with insurance.