One of the four financial health influencers is the volatility of income and expenses. Households impacted by such volatility find it difficult to achieve financial well-being. Increased expenses or reduced income often dictate tough lifestyle choices and increase stress levels beyond chronic. When there is increased income or reduced expenses, there is a less problematic increase in household discretionary funds and the fun that goes with it. Seasonal workers, those on fixed incomes, or subject to inconsistent hourly work schedules are especially vulnerable to this type of volatility. These financial shocks can have a devastating effect.
Income and expense volatility does not have to impede your pursuit of 6 Financially Healthy Behaviors. Volatility can be mitigated by preparing for it. John F. Kennedy once said, “The time to repair the roof is when the sun is shining.” Don’t wait for it to rain before you prepare.
One cause of volatility is “stuff happens.” Happens to everybody. No one is immune. To achieve financial well-being you need to possess the “capacity to absorb financial shocks.” Financial shocks often self-inflicted can come from external sources too. Geopolitical, weather or cyberattack events can disrupt the economy and your household. It is important to be able to manage and recover from the inevitable financial shocks.
Every household should have a disaster recovery plan. The foundation of a financial recovery plan is the Emergency Fund, the "liquidity buffer" between you and ruin. Building an emergency fund is your #1 priority no matter your age. You should well establish an emergency fund before you divert resources to a debt reduction strategy.
Emergency funds are highly individualized. Sufficiency depends on a variety of factors including your health, your age, your temperament, dependents, housing situation, the stability of your job, your risk tolerance, and more. Just be mindful of the truism, "It’s better to have money and not need it; than to need it and not have it." Your emergency fund can’t be too big. Its size may determine how it is stored but not its existence.
4 Ways to Jumpstart an Emergency Fund
Being able to deal with income and expense volatility successfully requires preparation. The base of that preparation is an emergency fund. Start or grow yours now.
12/15/2019 0 Comments
Continuing Series on the 6 Financially Healthy Behaviors
Often when it comes to money some of our behavior can subconsciously be influenced by our money habitudes or by one or more of the four external financial health influencers. This can result in frustration and missing your money goals.
Money is like food in a lot of ways. It is something that we consume and is necessary to live. Just as improper behavior in relation to food leaves you in ill-health; an improper relationship with money can prevent financial well-being. Crash diets and get rich schemes may provide short-lived results but without a fundamental behavior change the results will not last.
Here are 6 financially healthy behaviors working-class households can use in the journey to financial well-being. These 6 financially healthy behaviors will increase your financial capabilities and lower your money stress.
In no particular order of importance, the first financially healthy behavior is “uses an effective range of financial tools.”
Since hominids roamed the Rift valley into the plains of Africa, effective use of tools gives a person the ability to alter an environment for their benefit. That is true for your money environment also. Each household operates within a larger economy. That larger economy creates an environment ranging from wholesome to toxic that generates irresistible forces that impact households. Altering that environment for your benefit through the effective use of some financial tools will help you succeed in your financial evolution.
Credit cards are a necessary part of life in 21st century America. They can be a bane or a blessing depending on ownership. By that I mean, “Do you own your credit cards or do your credit cards own you?”
A well-managed credit card can provide increased monthly cash flow and lifestyle enhancements through rewards and other cardholder benefits. Cash advances can also be used as part of a last resort safety net or emergency fund. Credit cards should be proactively managed for rewards, utilization ratios, and annual limit increases.
Poorly managed credit cards lead to high-interest rate debt, stress, and a diminished lifestyle. This is like using a tool on yourself instead of on your circumstances. This is what happens to the undisciplined money managers and impulsive spenders. If this is your situation, there is hope. You don’t have to stay that way.
Everyone engages with the economy through Financial Services. These services and products are sold by a variety of entities. Accessing these services requires both prudence and due diligence. Buyer beware! There are many “trick and trap” instruments promoted to the ill-informed and desperate. Loans of all types can have such terms: Payday, Title, Student, Mortgage, Auto, etc.
Strategically accessing capital when you need it is a good thing. Of course self-funding, though not always possible, would be the best course. There is nothing wrong with borrowing. But do so when it is the only option left. Borrowing should never be your first option. Do you really need to borrow? What are the terms? Can you maintain the payments even if your income is reduced?
Checking/Savings accounts are necessary to engage the economy. These deposit accounts give you access to cash and the ability to make payments. Your deposits are held securely until you access them through cash withdrawals, debit cards, wire transfers, or ATMs. Lack of access to these basic services has left many “unbanked” at the mercy of the unscrupulous and greedy. Those that do have access must be ever vigilant of fees and other balance reducing charges that are profit centers for some financial institutions.
Continuous financial education must be a value that you fully embrace. Thanks to Google, YouTube, MoneySmartLife.org, and a plethora of financial websites and books you can always be informed about your money. Being informed will help you make better decisions and plan for success. You don’t have to be an Accountant per se, but you should be fluent enough to discuss your situation with one.
Be aware when consuming financial information of its source and affiliations that may result in bias or steering. Look for objective sources of information like MoneySmartLife.org. This is not to say there isn’t great information on commercial sites. There most certainly is. Just be aware of whose paying the piper for the tune being played.
Investments are assets you have above your living expenses and emergency fund. They generally have a long term purpose or goal such as capital appreciation or income. Whether you engage a Financial Advisor or decide to go it alone, the basics must always be satisfied. Those are your time horizon, risk tolerance, and the suitability of the investment. All three should be satisfied before you invest or engage an advisor.
The main thing investments should do is put you on the positive side of the interest equation. Which side of the interest equation is more characteristic of your money; paying it or receiving it?
Insurances are part of your risk management strategy and disaster recovery plan. Having appropriate coverages can help you offset a loss due to a covered event. Life, health, home, auto, business, renters insurance markets are highly competitive. This means you should regularly review your coverages and seek competitive quotes. Make sure whichever company you choose has a reputation for fairly paying claims.
Money paid in taxes doesn’t contribute to your wealth. Therefore utilizing available Tax Shelters lets you keep more of your money. Shelters don’t have to be elaborate but simply available such as charitable contributions, self-employment expenses, 401(k), HSA, or mortgage deduction. Paying taxes contributes to the quality of life. It is the irrefutable responsibility of every person to pay some taxes. But you should not pay more than you owe. As an American, my attitude toward all forms of taxation is the same. Tax evasion is a crime. Aggressive tax avoidance is our patriotic duty. Since tax law frequently changes this should be a part of your continuing education.
A Credit Score can be a tool. Maximize your credit score. Excellent credit (750++) will allow you to take advantage of sales incentives like sign and drive or 0% interest car loans. You will also get lower interest rates when you do borrow. Move your credit score up above 775 strategically and on purpose.
Your ability to borrow should be viewed as part of your safety net. Your credit card cash advances and spending limits are criticalcomponents that can be managed to help mitigate some of the impacts of an emergency while buying you time. An excellent credit score can give you immediate access to additional money during an emergency. It is a MoneySmartLife strategy to responsibly and proactively expand your borrowing capacity annually. Just as your net worth expands annually so should your credit capacity.
These 8 money tools are available to most working-class people. Know how to use them capably. The cliche applies, "it is a poor worker who blames the tool."
The World Bank defines “Financial capability as the internal capacity to act in one's best financial interest, given socioeconomic environmental conditions. It, therefore, encompasses the knowledge, attitudes, skills, and behaviors of consumers with regard to managing their resources and understanding, selecting, and making use of financial services that fit their needs.”
Ultimately the responsibility of learning how to manage money rests with the individual. If you think somebody cares more about your money than you do; you have another think coming. Effectively using all available money tools is on you.
Current events dictate that it would be wise for every family to have a disaster recovery plan. Stuff happens all the time. Some of it not of your own creation. Whatever its source, it impacts you and forces you to regroup. What are you going to do when disaster strikes? How are you going to recover from it? One of the important aspects of financial capability is Protecting. You have worked hard to make gains to achieve financial well-being.
Resilience is an important part of financial well-being. As any world-champion prizefighter legendarily says, “it not just how hard a punch you threw; but also how hard a punch you took?” that matters. Being prepared and not just depending on luck or largesse to bail you out of a tight spot is a Money Smart Lifestyle. In the fight that is working-class financial life in 21st century America, a properly resourced emergency fund will help you absorb and recover from life's inevitable shocks. Your emergency fund can contain more than just cash.
Prepping is a movement. The focus of this post is narrow. It is an overview discussion of food stores as a portion of an emergency fund, not a preppers guide. Prepper or not, it is prudent for every family to have a food security plan that anticipates disruptions. Also when properly integrated, a food store can become a cash flow resource. Let’s look at some basics.
Types of disruptions where everybody is affected by the same catastrophe. You should be able to sustain your family for a minimum of 3-7 days in the event of a catastrophic event.
There is a chronic lack of cash when your income is routinely reduced through employment practices such as temporary layoffs, reduced hours, uneven or seasonal schedules, and lost hours due to unpaid sick or disability leave. Using a food store as part of your meal plan can reduce stress and the need for cash during such times.
Types of disruptions where society collapses for 90+ days by a zombie apocalypse or whatever is beyond the scope of this blogpost. Besides, you won't be using Money anyway, but your food stores may have some barter value. Good luck.
Here are some things to do to start prepping for disruptions. You don’t try to swallow the elephant in one bite, so to speak.
Make sure the plan works by rotating your stores regularly. Rehearse emergency situations before the emergency arises. These dry runs can be made into fun family activities. They will let you see where your plan needs tweaks. Can you really make 7 days of interesting meals using only your food store? Don’t wait until you have to do it to find out if you can.
Holidays are times of gathering for families. As such it provides opportunities to help the extended family strengthen its economic foundation. These are the perfect times to discuss estate plans, elder care, custodial expectations and more. Now that sounds pretty heavy and it may be depending upon how your family views these subjects. But not talking about it isn’t wise.
Normally estate matters are resolved as part of a process that takes time to complete. But they must be started. Start with the easy stuff. Are wills in place for all adults 18 years and older? What happens to the kids? Are there durable power of attorneys and health care directives in place for all adults 18 years and older? It is better to have these discussions before a crisis requires them. Not having proper estate plans in place has put significant stress on family relationships regardless of assets forever. Yours will be no different.
Take the next steps depending on what is learned. Help those that have no plan get one written and recorded. Encourage those that have a partial plan to upgrade. Lead by example.
Family gatherings can also provide opportunities to save money through the elimination of redundant streaming services expenses. Most streaming services allow for multiple profiles or device logins. Maximizing profiles used for each service and spreading the cost of the subscriptions can expand extended family access while lowering individual unit costs. This is also a time to review subscription services already shared to see if they are still used and eliminate those that aren’t.
Some services can be eliminated seasonally depending upon demand. The family can adopt a “binge and go” strategy. This is where a service is subscribed to for a period of time to allow episodes to be binged. The effect is to make the service disposable, use it then lose it. This eliminates autopilot spending that subscriptions require.
Here is a list of some popular subscription streaming services and links to their multiple user policies:
Power outages and interruptions happen. If they happen often enough or for long enough you could be eligible for compensation from DTE and Consumers Energy. The Michigan Public Service Commission (MPSC) Service Quality and Reliability Standards requires utility companies to compensate customers for losses associated with power outages. Rules regarding outage service credits and eligibility requirements can be found in the MPSC’s Service Quality and Reliability Standards. These standards provide customers a $25 credit upon request if the utility’s investigation of your request determines you have experienced a qualifying outage.
There are 3 types of available credits:
An investigation will be conducted and a decision will be rendered within 30 days. Your claim will be summarily denied if: