If you suffered a crisis like a serious illness, job loss or investment setback, would you be financially prepared to handle it?
Most people know they should have a rainy-day fund, enough money to cover expenses for three, six or 12 months. But most don’t actually have a fund earmarked for just that purpose. Instead, the rainy-day fund is mingled with other cash or investments.
Of course, even a healthy fund might be too small if things were really bad.
As the smoke cleared from the financial crisis, some economists said big Wall Street firms should be required to have a kind of “living will” that would lay out in advance the steps to dismantle the company and sell its parts in the most orderly way possible. The idea was to avoid lurching from one response to another, sometimes at cross purposes.
But what would such planning entail for a typical household?
Generally, it would be a series of actions to take as the emergency got worse or lasted longer, so the family could prepare for the next step well before it had to be taken. Ideally, the process would enable you to weather a crisis longer and postpone desperation moves like walking away from your mortgage or taking an unsuitable job – things that could do permanent damage.
The first step, obviously, is to build that rainy-day fund, socking money away in checking or money market accounts that are safe and also accessible, even if interest earnings are small.