The fine folks over at Emergency Essentials have a brief blog post on preparing to weather financial storms.
For those of us who are old enough to have experienced the Great Recession in our adult life, the thought of another economic crash occurring is a very real worry. Even the most prepared individuals felt the effects of a crashing economy in the years between 2007 and 2009. Some of us still haven’t fully recovered. Although the possibility of another recession is always in the air, unfortunately, most people are less prepared today than they were before the Great Recession began. If the economy were to crash tomorrow, could your finances survive?
If the answer is, “I’m not sure”, you should definitely continue reading. In the following post, we will present five questions to test your financial preparedness and help you to get completely ready for an unexpected economic future.
Do You Spend Too Much On Your Debts?
Truth is, many people are simply overextended with their debts, using their credit as a way to live beyond their comfortable means. Even in an economic recession, your debts will not stop and your debtors likely won’t “give you a break.” If you lost your job today, would you be able to afford your debts next month or would you suddenly find yourself having a hard time keeping up with your mortgage and car note?
Many financial consultants recommend a debt-to-income ratio of 1:3. This means that your debts should be equal to or less than 33% of your monthly income. This rule ensures that if you were to become unemployed today, you would still be able maintain your debts with only ⅓ of your current income.
What To Do About It
Assess your monthly debts and compare them to your monthly income. If your debt-to-income ratio is already lower than 33%, great, keep it that way. On the other hand, if you find that your ratio is higher than this, here is some advice:
- Pay Down Your Debts: The most obvious way of decreasing your debt-to-income ratio is to maintain your income, while decreasing your debts. Examine how you spend your money each month. Identify areas where you can save money (eliminate or decrease cable services, etc.) and use this extra money to make additional payments on your debts. Every debt that you are able to eliminate equates to one less worry in the event of another economic recession!
- Refinance for Better Interest Rates: High interest rates that you carry on your debts can add significantly to your debt-to-income percentage. Work on improving your credit so that you can refinance your mortgage and car loan debts for better rates. Speak with banks and other credit card providers to see if one of them will offer you a credit card with a lower interest rate than what you are currently receiving.
How Large Is Your Emergency Fund?
Unfortunately, for many people, the answer is “not large, whatsoever.” According to a GoBankingRates survey, 35% of all adults in the U.S. only have “several hundred dollars” in their savings account and 34% have no money at all in savings. It is generally recommended that you keep 3-6 months of income in your savings as a safety net, in case your income becomes restricted for any reason. While this is a great start, is it enough? The Great Recession lasted two whole years, and the effects, much longer. During this recession, many people found themselves without a job for much longer than 3-6 months. Some financial advisors, like Suze Orman for example, suggest an emergency fund equal to at least 8 months of your income.
What To Do About It…