We all know that financial management as a debt solution can work. But did you know that it is more beneficial if you use it as a preventive measure? Instead of waiting for the financial disaster to happen, doesn’t it make sense to stop it from happening in the first place?
That is what we all need to do. To prepare for the uncertain future to so we can make sure that we stay away from a financial ruin. Since it is hard to predict what will happen in the future, that is all that we can really do.
Evidence that we are not financially prepared to survive a crisis
Despite everything that we have gone through in the past few year, it is evident that we are still not as prepared as we ought to be. With all the issues in the government (e.g. government shutdown and debt ceiling) that can lead to a financial disaster, we need to start acting and we need to do it now.
A 2012 report published by the CFP Board (Certified Financial Planner Board of Standards, Inc) and Consumer Federation of America revealed that American families are still trying to get over the last recession. The report entitled 2012 Household Financial Planning Survey discusses how the struggle lies in trying to meet all the financial obligations that multiplied during the recession. Of course, we are referring to the credit payments that exploded in the height of the spiking unemployment rate. A lot of people, being unprepared as they were, had to rely on credit to buy the basic things that their family needs. Now, as the economy is also struggling to give jobs, all these debts are catching on to us and trying to pull us from the financial recovery that we want to have.
The same report cited a study by the Princeton Survey Research Associates International that showed how even in a stable economic condition, Americans are already challenged to meet basic financial goals. These include retirement, college fund, emergency savings and staying out of debt. What more if the economy is not as healthy as it should be?
The other findings of the report from the Consumer Fed and CFP Board includes:
Meeting financial goals became even higher in as unemployment, income levels and personal net worth all went against the favor of the average consumer.
In 2010, the median family net worth is $77,300 – down from $126,400 in 2007.
Financial planning is a vital factor in separating the people who are able to meet financial goals and from those falling behind.
31% of household decisions makers have a financial plan.
35% of households have a plan for emergencies.
Those who plan feel more confident when it comes to financial decisions. They also save more and feel that they have better progress in reaching their goals.
Regardless of the income group, those who plan have a higher score in terms of being financially prepared, compared to those who did not bother to plan at all.
38% of families are living from paycheck to paycheck while 30% feel financially comfortable (2012).
In another study from the Employee Benefit Research Institute specifically paints a picture of retirement planning. The highlights of the study includes:
28% are not confident about their retirement – an increase from 23% in 2012.
Retirement confidence is low because of the daunting saving goal that consumers are forced to meet. 20% of respondents believe they need to save 20% – 29% of their income while 23% need to save 30% or more from their income.
46% claimed to have calculated what they will need to retire.
Only 2% (workers) and 4% (retirees) think that retirement planning is the priority financial concern.
55% of workers and 39% retirees are admitting to having problems with the amount of debt that they owe.
The list goes on and on but the bottom line here is that our financial life is still in chaos and not everyone is planning for it. Some of us may be going through debt relief programs to help deal with debt but beyond that, we have no plans at all. What you have to understand is that a financial disaster will not spare you just because you are already struggling with your debt and finances. You need to start working on some preventive measures before bad things start happening.
3 keys to prevent yourself from financially sinking
Fortunately for you, there are three factors that can help you avert a financial disaster. At the very least, it can soften the blow in case the crisis is initiated by something that is beyond your control (e.g. stock market crash, etc.)
Changing your bad habits
The first of them is changing the wrong habits that got you in a financial crisis. These include overspending unnecessarily, not living on a budget and taking on too much credit.
In the last few years, the Bureau of Labor Statistics have noted how the average expenditure in an American household have grown over the years. In 2010, the average expense is $48,109. It grew in 2011 at $49,705. Finally in 2012, the household expense is now at $51,442. You may argue that the cost of living is steadily rising too. Well here’s proof that we are not learning from our mistakes. In the category of food expenses, we are spending an average of $3,921 eating food at home and $2,678 eating outside. Instead of just skipping the meals outside, we could save more just cooking our meals at home. While there is nothing wrong with eating outside, you need to calculate carefully how that affects your overall financial standing and that goals you are trying to reach in the future.
If you want to prevent an impending financial disaster, you have to start correcting the habits that are wasting your limited resources.
Adapt a vigilant mindset
We do not want you to be paranoid or anything but we do want you to be prepared. Having a vigilant mindset will keep you from assuming that things will always be great financially. It is not like you need to be a pessimist but just keep in mind that things can go wrong and you need to be prepared for that possibility. In every financial decision that you will make, ask yourself how you can cope with any payment involved with it in case your finances turn for the worse? What are you willing to sacrifice to keep a debt from overcoming your life? It is okay to be risky especially when you are investing to grow your money. But always do it within reason. Balance being risky and conservative at the same time.
Draft a back up plan
This is a plan that you will have in case something happens. It will tell you what to do in case your job or business goes under. This plan will tell you the type of frugal lifestyle that you will have to adapt into so you can maximize what finances you have without resorting to credit. This will help protect you and guide you even as your emotions are swirling around you. This plan will help you take one step at a time towards recovery – even before you know it. Sometimes, events leave us dazed and it helps to have an emergency financial plan that is keeping us from financial disaster.
In truth, surviving a financial crisis may be difficult but it is not impossible if you are well prepared for it. You never know what happens tomorrow so stop making excuses for yourself. You have to act now and start making these preparations.
Here is a video from National Debt Relief that we hope can help you provide a safety net for your family.