Weathering Financial Storms

“Into each life some rain must fall” was aptly said by poet Henry Wadsworth Longfellow. As farmers and gardeners, we appreciate how an adequate supply of rain with great timing helps us maximize our efforts. Prolonged rainy spells like our recent April really make us appreciate the warm spring and summer days all the more. But this article isn’t about horticulture, it’s about your family’s finances and steps you can take to prepare for rainy days and how to weather financial storms.

None of us knows what the future holds. But by taking appropriate steps we can weatherproof our finances so when financial storms approach we are prepared. Examples of financial storms are job loss, illness, death, divorce, reduced income, boomerang kids returning home and parenting a second time around. While we can’t predict many of these events, the following suggestions will go a long way to helping you prepare in the event you must deal with them.

Let’s start by examining resources, both personal and community.  Your personal situation and where you live will affect which resources you can rely on. A thorough review of several financial parameters is critical to understanding your situation and developing strategies to improve it. Establish your financial baseline by determining your net worth – subtract what you owe from what you own. Don’t panic if it is a negative number. Net worth provides a barometer of your financial success. Many young people and self-employed find they have a negative net worth. Over time you should see your debts reduced and your assets increased.

Calculating your debt-to-income ratio is another tool to gauge your financial success. Excluding your mortgage, total all your monthly debt payments and divide by your monthly take-home pay. If this ratio exceeds 15% you may be feeling financial pressure. Take steps to pay down debt and avoid taking on any new debt.

Creating and using a budget will really help you get a handle on where your money comes from and where it goes… instead of wondering where it went! A key category in your budget should be establishing and funding a “rainy day” fund or emergency fund. Current recommendations are to have from six to nine months of living expenses set aside in mostly cash accounts. If you aren’t currently “paying yourself first” by setting aside savings BEFORE paying all other bills, start slowly, but get started. Become more businesslike in handling your personal financial affairs. Constantly seek ways to save money and establish a bookkeeping routine so you don’t find yourself wasting money on late and overdraft fees.  If you lose a job, your first step should be to apply for unemployment compensation through Pennsylvania’s Department of Labor and Industry.

Community resources are an often overlooked asset that can help you move beyond your current financial storm by allowing you to maximize your personal resources. It may require you to swallow pride and ask for help, but consider others you may have helped in the past and opportunities you may have to do so in the future. Many community resources exist to give a hand up, not a hand out and are willing to help you get through your financial storm. Learn what resources are available by checking with your local United Way or social service agency. Most agencies have a good feel for services that other agencies in their community provide.

Just as meteorologists can’t predict the future weather with 100% accuracy, none of us knows for sure if/when/or how big a financial storm we may face. But by taking the above actions, you and your family will be well-prepared to weather financial storms.