August 11, 2011

Backup Emergency Financial Plan 2.0

Over two years ago now I wrote an article Backup Financial plan in Case of a Job Loss in which I discussed my general plan for how to handle our finances in case I lost my job.   Since it has been a while I decided to update the plan a little bit.

My primary focus would be to find another job in my field.   At the same time I would want to make immediate changes in our finances as well as plan for other changes that we may need to take if I'm unable to find work in my field for an extended period of time.

The point of doing this kind of planning is not to be pessimistic or expect to lose a job.   The idea here is that I'll want to be reasonably prepared in case something bad happens.   I don't want to be surprised by a job loss and find myself without any kind of plan then plod along doing the same things.   Of course I could just cross that bridge when I come to it but  another point of doing this kind of plan is to make sure my finances are not setup poorly in the event of a job loss or other financial problem and so that we're prepared to weather any kind of financial emergencies that might arise as best as possible.   For example it might be very beneficial to have better cash flow in case of a a financial emergency and that may be a good reason to refinance some debt now.

FIRST YEAR

Step #1. - Cut back our spending so our short term income will cover it.
 
For the past 12 months we've averaged approximately $4,000 a month in total spending.   That includes our home mortgage, utilities, food, entertainment, travel etc.   I am however excluding  a one time medical expense.

Home phone, cable, netflix, cell phones - All of these have extra charges that we could cut back on. We should be able to trim $100 off these bills pretty easily just by eliminating some of the extras.
Clothing, Travel & Gifts - I previously said we'd cut all these 100%.   I might loosen that some and not cut them 100%.  After all I wouldn't necessarily cancel Christmas and clothing does wear out so we might need to replace a few items.   I'd probably cut travel, clothing & gifts by say 90%.   We could probably cut around $300 off our budget in these areas.
Eating out  and groceries -  We continue to spend alot of money on food.  I'd still cut eating out by 90%.  We'd also want to trim our grocery budget as well.   We should be able to cut $500 in this category.
Entertainment, discretionary, misc - For entertainment and other misc. areas that we fritter away money we could cut 90%.  That would save us $150.

Total of cuts $1,050

Step #2 - Get health insurance

I'd probably sign up COBRA initially.  Our plan isn't super expensive.  Its not cheap but health insurance isn't usually.  I looked up our COBRA premiums and it would be about $770 a month.   However our plan has a high deductible and HSA.  We would also want to make sure we have some money in the HSA and/or bank to cover the deductibles.

We would want to shop around and see if getting our own health insurance would be better for us financially.   I just did a quick search on eHealthInsurance and it looks like we could get a similar high deductible HSA plan for about $200 less per month.   Of course I'd have to read all the fine print to make sure that plan isn't lacking stuff we'd need.   Also COBRA only lasts for 18 months maximum so after that we'd be forced to get our own coverage.


Step #3 - Look for other cuts and find alternative income

Other ways to cut spending:

  • We should be able to further cut our cell phone, home phone and cable bills. 
  • Sell one of our two cars which would cut our insurance costs and give us some cash. 
  • We could shop around and switch insurance companies.  Right now we're with Amica insurance which is a great insurance company.   J.D.Power has rated them #1 for 12 years in a row.
  • Trim grocery costs by using coupons more and shopping around better.

Find ways to make money:
  • We could have another garage sale to sell off our extra stuff.   That would give us a few bucks but it wouldn't give us any ongoing income.
  • I make some money off this blog but not a whole lot.  I haven't put a lot of effort into monetizing the blog.  I could look into ways to make more money here. I might hire Crystal to help.
  • My wife and myself could potentially do some work tutoring. 
  • I could put up a shingle and do computer work on my own.  
YEAR TWO

Step #4 - Sell or refinance real estate

Right now our cash flow from our rentals is not maximized.  If I were to consolidate and refinance debt I could cut our monthly payment.  I'm not sure if banks will refinance debts when you are unemployed however.   I might be able to get a loan from a relative with the properties as collateral.

Currently we own 3 rentals and our home with combined equity of roughly $450k.   We have mortgages on one rental and our home.   The balances on those mortgages are about $140k right now and our payments are about $2,300 per month with taxes and insurance.  If we refinanced that today then we could cut the monthly payments by $1000 or so.

Or we could sell 2 of the rentals and pay off both of the mortgages.   That would give us about the same cash flow change but without the mortgages.   However you can never tell how easily you can sell a property.   It might work best to refinance first to improve the monthly cash flow and then put the 2 rentals up for sale.  Then if we sell them eventually we could remove the liability of the mortgages.

Step #5 - Career change and/or move

This is the final stage of dealing with a financial emergency. If I'm unable to find a new job in my current field in my area then I'd have to consider either changing careers or moving.   I might want to do both at that point.   Moving back to my home town would definitely worth considering.  Housing is cheaper there and the rental real estate market is better as well.   We could feasibly sell our properties here and buy a house and rentals in my home town and end up with enough rental income to support ourselves.   However selling properties is easier said than done and it could take several months to sell.

Step #6 - Selling assets to feed ourselves

Selling properties off over the years may allow us to keep ourselves afloat for a long time.   If we start with a pile of cash, refinance our mortgages and limit our expenses then we can afford to live for around 10 years.   Then after 10 years we could sell our rental here to get some cash out of the equity.  Then we could sell our home and move to my home town giving us some more cash.   Finally we could sell off all our out of town rentals to get cash as well.   Of course selling the rentals would reduce our monthly income but it would give us a pile of cash to live off of for a while.   You don't want your financial plan to consist of selling off all your assets one by one until you're finally left with nothing as that won't make a good retirement.   However if worse came to worse we could feed ourselves for a while by selling off assets one by one.   Meanwhile our retirement accounts would all be untouched and growing in value over the years.  I could feasibly not work for the next 20 years and then retire following this method.   It would be a low income subsistence level lifestyle however.


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