A financial survival plan

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(NNPA)—Ben Sherwood in his book, “The Survivors Club,” studied people who had survived some of the most horrendous human tragedies. According to Sherwood, “No matter the adversity, the navy says, survival is a mentality, a way of thinking. Survival is also a lens, a way of perceiving the world around you. The survivors in the military share a constant outlook and approach, which they believe can also be applied to the struggles of everyday life. They understand that crisis is inevitable and they anticipate adversity. When they face a challenge, they observe and analyze the situation, devise a plan, and move decisively. If things go wrong, they adapt and improvise. If they get overwhelmed, they recover quickly. They also know how to wait for the worst to end.”

During 2008/09 we witnessed the worst recession since the Great Depression of the 1930s. Millions of Americans were thrown into the financial abyss of job loss, home foreclosure, bankruptcy and in extreme cases, dissolution of the family. What did we learn about surviving a financial crisis and how can we better prepare ourselves for future crisis that are likely to occur?

The profile of vulnerability

The profile of families that are most vulnerable to failure during a financial crisis would probably look something like this:

•Living paycheck to paycheck.

•Little or no liquid cash reserves.

•A high level of credit card debt.

•Highly leveraged—Home mortgage is more than 80 percent of home value.

•Inadequate insurance.

•No financial plan.

Financial survivors have a profile that is just the opposite of the profile listed above. Even if they incur a job loss, an extended illness or a down investment market, they are resilient and are able to weather the financial storm. Their financial survival begins with a broad awareness of their financial circumstances.

Situational awareness

Situational awareness is a military term that means being aware of what is happening around you and understanding how the information and events and your own actions will impact your present and future goals and objectives. From a broad economic perspective, having situational awareness would mean being attuned to the direction of the national economy, investment markets and interest rates. Then understanding how these factors may impact your personal investments and financial plans.

Situational awareness could mean understanding your company’s financial situation, your manager’s political clout, your position on the seniority list and how any one or a combination of these factors affects your job security. If you feel your position precarious, it may be a good time to update your resume and begin networking with outside business associates.

Be prepared

The keys to a strong financial survival plan are the same as good personal financial planning.

Emergency fund. Build a short term savings account, with a balance equivalent to three to six months of your expenses. The purpose of an emergency fund is to carry the family through short-term emergencies, such as job loss, physical disability or a natural disaster.

Reduce your debt. The impact of debt is magnified during a financial crisis. Late payments are compounded by late fees and interest charged on interest.

As we move into an economic expansion, do not create any additional debt.

If you have credit card debt, begin to work it down now.

Investments. If you work for a company, don’t hold more that 5-10 percent of your net worth in company stock. If you have a 401(K) retirement plan, spread your investments among several funds. If you have investments outside your company plans, select a good mutual fund company and go for quality.

Insurance. Work with your insurance agent to review your medical, property and casualty, liability, disability and life coverage. Can you integrate them with your employer insurance plan to enhance your coverage and possibly reduce your premium expense?

Being a financial survivor is a way of thinking. It begins with situational awareness, then preparation, adjusting to changing circumstances and finally having faith that the financial storm will pass.

(Michael G. Shinn, CFP, registered representative of and securities and investment advisory services offered through Financial Network Investment Corp., member SIPC. Visit http://www.shinnfinancial.com for more information.)

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