Financial Planning For Any Weather

May 06, 2015

In some parts of the country, May means beautiful flowers and beautiful weather but for most of us, it also means checking the weather app on your phone constantly to have a clue of what’s going to happen. Will it be a mild spring day, rainy, or shorts and flip-flop weather? At least you can get a good guess from the weather app, but what about the unexpected events in your financial life? How do you prepare for life’s unexpected changes?

Forecast – Rain

Maybe someone got hurt, the roof is leaking, or there is a short-term job loss. This is what your “rainy day” (a.k.a. emergency) fund is for. The goal here is to have 3–6 months’ worth of your regular monthly expenses in savings just for emergencies like these.

If you haven’t got a fund started, make a short-term goal of $1,000 in the next 12 months. That’s just $20 a week or the cost of your typical meal on Friday night. This could also  literally be a rainy day or maybe a hurricane, tornado or some form of natural disaster. In those cases, having emergency supplies can help you get through a weather and financial emergency.

Forecast – Storm

This is when someone has a long-term job loss or two bad things happen at the same time.  Just like it isn’t smart to drive to the store for supplies during a hurricane, now is not the right time to make budget decisions. Prepare for the extended storm now by going through your budget and looking for areas that you could cut back on if you had to. Categorize your expenses into needs and wants, with the wants being the first to go. Eating out, enjoying satellite or cable TV, and having unlimited cell phone minutes may be a nice-to-have during sunshine, but in times like this, it’s man versus weather.

Then you still have to prepare in case this is a longer term situation and look at which of your needs could be scaled back if necessary. Have you shopped your auto insurance lately? Maybe you don’t need comprehensive coverage on the older car anymore. If you’re down to one income, do you need two cars?

If you’re renting, could you move to a less expensive apartment? If you own, could you refinance to lower the payment or maybe take in a roommate/tenant?  These aren’t fun things to think about but if you have a plan in place now, you will make better decisions if the time comes.

Forecast – Record Highs

This could be a onetime windfall such as a large tax refund, a big bonus, or an inheritance.  We should never count on these things as part of our overall financial plan, but when fortune smiles on you, be sure to have a list of priorities at the ready. It becomes very easy to spend it without thinking and then you end up with not much to show for it.

Start playing the “what if” game. What if you had $5,000, $10,000 or more? Would you pay off debt, fix up the house, save for retirement/college, or take a vacation? Plan now so you’re ready.

A good rule of thumb may be to set aside 25% of the windfall for fun and 75% for long-term goals.  So if you received $4,000, you could spend $1,000 on a long weekend trip or a new TV and the other $3,000 on building your emergency fund, paying off the credit cards or funding a Roth IRA. Obviously the bigger the amount, the more fun you can have and the bigger the goals that you can reach.

Forecast – Sunny Skies

You finally got the raise you’ve been working on! Just like with a windfall, it can be easy to let this money just disappear with changes in your lifestyle. Instead, set priorities so that you have a plan for what to do with the extra money before it hits the bank account.  Use a similar process (the 25/75 ratio) where you enjoy some of your hard earned reward but most of it goes towards meeting your intermediate and long term goals. Review your budget and plan now for what it could look like if you had that extra $500 per month for example.

A little planning can go a long way. Start now, and enjoy May. Just don’t ask me what the weather will be like!