How To Prepare Before Financial Calamity

February 11, 2011 | Posted By: Andrew Wang
People are still losing their jobs, diagnosed with cancer, struck by hurricanes, fires and floods. The dollar is falling. How can you prepare for the worst and protect your personal finance?

Step 1: View your financial snapshot
You don't know how to prepare if you don't know where you are vulnerable.
  • Find out your monthly cash flow. How much is coming in and how much is going out?

  • Look at your net worth. All your assets (home, real estate, autos, money in the bank, investments, etc) minus all your liabilities (mortgage, car loan, credit cards, other loans, IRS debt) = your net worth. Your net worth should be about your age x your pre-tax income, divided by 10. So if you are 40 and make 100,000: 40 X 100,000 /10= $400,000.

  • Find out your credit score.

Step 2: Start saving
If you don't have an emergency fund, get one now. You need at least three to six months of expenses saved. With jobs taking longer to find, saving even more will keep you safer. Sell stuff, get a part time job, do something to get money in the bank as soon as you can.

And to save more, you need to spend less. Spend as little as possible on things that aren't necessities until you have a significant savings.

Step 3: Pay off your debt
Calculate all the debt you owe (your liabilities). Pay off those credit cards first. There are two methods that work:
  • The snowball method proposed by Dave Ramsey has you paying off the smallest debt first and paying the minimum on the rest. Once the first card is paid off, use the money you were paying for that debt on the next smallest debt. When the second card is paid off, use the money you were paying on that debt for the next smallest debt. You can see progress quickly and get your debt paid off.

  • The second way is similar, except you are paying your highest interest rate first. You pay off your credit card with less interest this way. The drawback is you may not see progress as easily and give up.

    Next pay off your car loan, student loan, second mortgage and other debt.

Step 4: Evaluate your home
If you are having a hard time paying your mortgage, you may need to downsize before calamity wipes you out.

With good credit, you might be able to re-finance your home loan. Try to opt for a 15-year instead of 30-year mortgage. We are paying 76% more for housing than people did a generation ago.

Step 5: Keep your job options open
Remind people of who you are before you are out of work and need your network to help you find a job. Update your resume. Keep in contact with your network and join the social media world. Plus, having a good social network can help you cope with calamity if it does hit.

This is a guest post from Andrew Wang. He publishes the personal finance blog Money Alps.
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