Managing Financial Crises: Self Reliance Course Report Week 9

Inching closer to the end of this course (12 weeks), the topics are becoming more applicable to me. This week the lesson is on managing financial crises.

Communication

As usual there is a mini principle before getting into the main lesson. This week is on communication. While pondering how and when our prayers have been answered, we begin a discussion about listening. Generally it can be said that thoughts can come from our hearts or our minds. This is a bit abstract, but I think it’s an important distinction and something to think about. We can start to notice patterns in our prayers and choices and see whether our thoughts come from the heart or the mind. I tend to be more logical while my wife is more emotional. Some topics we switch though.

In learning about being a better listener, it’s important to really concentrate on what the other person says and try to validate them. Many times it is powerful to recap what they said in their own words. We might be surprised at how often we think we understand their point but don’t. Some discussions don’t merit this approach for every back and forth, but it’s something to keep ready.

Protecting Family From Hardship

We started out by reviewing our budget and then taking a survey that goes through all the categories. We indicate whether we spend too much, too little, or we feel good about the amount that particular category is. Out of about 10 categories, I felt I spent too much, but I never marked that I spend too little. I’m a pretty content guy.

Now that we have a sense of our feelings about categorical spending, we ponder how we would handle a financial crisis. As a group we talk about the many crises that can arise, and came up with this list:

• Natural disasters
• Lawsuits
• Identity theft
• Burglary
• Medical problems
• Layoffs
• Recessions
• War
• Scams
• Car accidents
• Death of a family member

Have a Plan

It’s interesting to note that many families have fire drills, or even tornado or earthquake drills. How many people do you know have financial crises drills? Maybe we don’t need to go through a drill, but having a plan would be really good. Putting that into writing and signing it would be even better.

Once you have started coming up with some ideas on how you would handle a financial crises it’s important to take action:

• Make sure you have insurance coverage and it’s up to date and sufficient
• Ensure you have a reasonable emergency fund
• Know that some bills can be put on hardship deferral, while others are more important
• Identify backup resources that could help in a crises, like family, church or community

How Much Should I Have In My Emergency Fund?

This is a deeply personal matter, and experts suggest anywhere from 3-8 months. I will share that in my checking and savings accounts at any given time, there is enough for 2 months of bills. Outside of that, there is some opportunity cost to having too large of an emergency fund. Following this conventional advice can cost you as much as $800k in potential market returns, so I prefer to use what Mr. Money Mustache calls “Springy debt.”

This is also why I use my Roth IRA as an emergency fund. Money in a Roth IRA can be invested, but the principal contribution can be pulled out tax and penalty free at any time. While pulling money out of a Roth would not be ideal, it would still work. It’s a really good idea to make your emergency fund somewhat more difficult to access than your normal checking and savings account. Having some separation from your daily use accounts helps you stay away and not touch it. Of course, I don’t want to lose the tax free growth in my Roth IRA’s, so I’m extra motivated to keep that money in there and growing. I maxed it out two years in a row, which gives me approximately 6 months of emergency fund on top of my 2 months in checking.

Conclusion

It’s really important to take an inventory of your financials every so often. Review them with your spouse, partner, or a mentor. Come up with an emergency plan and put it in writing. You’ll be more likely to stick to it and have some peace of mind once you’ve thought things through. Decide where to put your emergency fund and try to make it tougher to access. It’s not good to tap into it for things that are not emergencies. If you are prepared you don’t have to fear.

Do you have an emergency fund? Where do you keep it? One of my favorite places for it is Worthy Bonds. They’re a near company that makes it easy to get started.