In the financial planning world, we tend to focus heavily on preparing for retirement. But of course, there are other aspects to creating a healthy financial outlook for yourself, both now and in the future.
Have you considered how a financial setback could affect your life now, and also far into the future? When a problem becomes significant enough, you might face the choice of taking out a loan that you spend years repaying. Or, you could feel tempted to borrow from your retirement fund (always a bad idea).
As with most things in life, preparing for a situation is better than dealing with it only after it occurs. But according to a recent report by the Federal Reserve, Americans are woefully underprepared for a financial setback. Did you know that 18 percent of households experienced a financial crisis in 2015? That’s almost one in five. The reasons behind these crises were reported as follows:
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- Health emergencies (36 percent)
- Lost jobs (25 percent)
- Loss of spouse’s job (13 percent)
- Reduction of work hours or pay (18 percent)
- Reduction of spouse’s work hours or pay (12 percent)
It’s probably safe to say that none of these events make a surprising start to a financial crisis. However, the greater point here is that these things are mostly unavoidable, and not simply the result of poor decisions or some other choice. In other words, to some degree, these things are out of your control.
Even more alarming was the lack of preparation uncovered by the report. When researchers asked how respondents would cope with an unexpected expense of 400 dollars, roughly half said that they would be forced to sell personal items or take out a loan. And remember, this is only 400 dollars we’re talking about. That percentage of “unprepared people” would likely rise higher along with the cost of the emergency.
It’s important to ask yourself how well you could cope with a financial setback if one occurred. If you have any questions about financial planning, and want to evaluate your preparedness for an emergency, give us a call.