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Financial Fire Drill – How to Prepare Instead of Panic

We practice drills for all types of disasters to help mitigate risk, reduce causalities, and provide peace of mind. Why not have a financial “fire drill”? Understanding what you will do if you’re faced with financial distress can help protect you from making harmful, hasty decisions, and give you confidence through challenging times. 

When you begin planning your financial “fire drill”, make sure to include all family members. What happens if your child asks you for help on a down payment of their first house? Will you give them money? What if your mother falls ill and doesn’t have the means to take care of her health needs? Consider what happens if there is an unexpected death in your family. How will the funeral be funded? What if one of the main or sole providers for your family is suddenly gone? Will you be able to adjust to reduced or no income? Knowing what your answer will be to these questions, before they happen, leaves the guess work and emotional turmoil out of it.  

A financial disaster can be either short term or long term, but you should be prepared for both. It is helpful to know what your absolute necessities are and how much they cost. Include only the essentials in this figure, like food, housing costs, utilities, necessary medication, etc. Although it may feel like it, your Netflix subscription and unlimited data plan are not necessities and should be excluded from your baseline number. Your short-term emergency fund should be enough to cover 3-6 months of your basic needs at the very least. Ideally, you would have enough cash to continue funding your current lifestyle without much sacrifice. Having an extended emergency fund, or at the very least a plan, is crucial for planning for a long-term lull in income. 

You should also consider the possibility that your expenses may increase due to the emergency that left you devoid of income in the first place. Maybe you got in a serious accident that put you out of work, but also landed you in the hospital for a month and physical rehab for six. You may also lose benefits you had from your job, like health insurance, your corporate car, or your phone. How will you cover these additional expenses? 

Many instances that disrupt your income in your working years can be covered by a disability insurance policy. Adding a DI policy to your emergency arsenal can greatly strengthen your chances at weathering financial difficulty. 

Those who are already retired and are drawing from their assets for income need a plan too. What if your source of income is down 10%? Do you have a strategy to reduce rate of return risk? Having a withdrawal strategy can protect against bad markets in retirement.  

These aren’t necessarily fun conversations to have, but they are very important. These strategies can involve some complex planning and will need regularly revisited, so it is best to work with your financial advisor to develop and maintain your financial plan.   

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc. 

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