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Financial Fire Drill

March 6th, 2009 at 03:28 pm

Have you ever done a financial fire drill? It's the equivalent of pretending an emergency has hit, and looking at what it does to you budget & savings. Most people don't sit down and do this important test until the fire is already burning. It's important to have a game plan before this happens as it will relieve a lot of the fear and stress that would hit in the event of an emergency.

I did it yesterday with my budgeting spreadsheet and was pretty happy with the results. I tried 3 scenarios; in the first 2 either my wife or I lost our job, without severance. The third scenario (doomsday) I figured we both lost our jobs tomorrow with no severance. I figured we would stop contributing to retirement immediately, so I cut our 401k contributions to 0, and stopped the biweekly Roth contributions. I also eliminated child care costs and savings for travel. I also cut back our overpayment on our HELOC.

In scenario #1, where my wife lost her job, the hit was not that bad (she makes about 50% of what I do, but provides our health insurance). I assumed we would go on COBRA at least short term, paying about $260 every two weeks (double her current premiums). This is probably overly conservative, since COBRA is supposed to be subsidized right now by the US of A. Surprisingly, we would actually not have to dip into the EF at all. We would probably not have to cut out vacations completely, and could still contribute a little to our retirement. So it would not be a catastrophe by a long shot.

Scenario #2 involves my losing my job tomorrow, which would obviously be a huge hit to our income (it would go down by approximately 66%). This is moderated a bit by the fact that we would still have health insurance through my wife's job. In this case we would have to draw approximately $1800-$2000 a month from the EF. Since our EF is about $41K right now, it would last us at least until the end of 2010, or about 22 months. I feel pretty confident that we would not get to this point without me finding some kind of work (even at a drastically lower salary).

Scenario #3 is the doomsday scenario where both my wife and I lose our jobs tomorrow, with no severance. In this case we'd have to draw about $5K a month out of the EF, which means it would only last until November 2009. Obviously not a pretty picture, but still an 8 month cushion for at least one of us to find a job.

Barring a total worst case scenario, I think our household would probably be able to weather most storms that could come our way. I recommend everyone run a FFD with their own household budget, to see how close to the edge you are.

6 Responses to “Financial Fire Drill”

  1. creditcardfree Says:

    That's a very good idea!

  2. Broken Arrow Says:

    That's an excellent point! I think everyone should run through it at least once. I recently did that, but in order to maximize my 401(k). Still, the effect was the same, and I ended up living on my savings.

    I'm still doing it in fact, but in the tail end of it now. I'm also very glad that I did it, because it made me realize just how much I underestimated my expense needs would be in case of a real emergency....

  3. boomeyers Says:

    Our COBRA is going to be $1000 for a family plan. Since my DH already pays $800 for it, this is one we are not too worried about right now.

  4. Dave Says:

    @boomeyers:

    Wow, that is high! I guess you will be happy to get the 65% federal subsidy (whenever it kicks in).

  5. ceejay74 Says:

    Our worst-case scenario would be all three of us laid off, drawing unemployment checks and unable to find work. I have an "emergency" version of my budget which contains only the necessities (mortgage, minimum payments to bills we couldn't get rid of or defer, health care, groceries, etc.). By my calculations, if NT and I received the same unemployment amount as AS, we'd be about $400 per month short. I may have overestimated healthcare costs, but assuming I did not, our current EF would last us 6 months covering the $400 shortfall. I think we could skimp on groceries and healthcare and a couple other things and maybe scrape by without it.

    This is assuming something catastrophic would happen with our UK rental and our parking-spot rental where we wouldn't have that income. If we managed to keep both of those incomes, there wouldn't be a shortfall most months, so the EF would last a LOT longer.

  6. monkeymama Says:

    I hadn't even thought of unemployment benefits. Phew! Since we have private healthcare anyway it doesn't matter. We'd have opportunity to find a job with benefits and lower our expenses then.

    Actually, we probably run through this (financial drill) way too much. But it's definitely a good exercise. I do also notice our "in good times
    " financial emergency plan is drastically different than one in this economy. Sell the car for 3 months' expenses? I think we would be lucky to get 1 months' expenses right now. Downsize the house (drastic, long drawn out emergency)? Good luck. Borrow money? Think again. Tap retirement in the worst case scenario? Is anything left to tap? SO it's definitely good to think through as things change. Savings, and an ability to live on much less income would save our bacon, for sure.

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