We all practiced fire drills at school or work. The alarm goes off and you have to disrupt what you are doing and exit the building. Each time we practiced what to do in case there was a fire so if there ever was a fire, we would all know what to do. This can seem pointless at times given the general instructions are drop what you are doing and get out. We do fire drills because in actual emergencies, you don’t have time to think. You have to react. You’re caught off guard. Your heart is pounding. Your mind is racing.
That’s why we do the drills. When every second counts we know what to do. Having a financial fire drill is the same thing. It is preparing in case of emergency. So, when an accident happens, you know what to do even when your mind is racing and heart is pounding.
You’ve likely heard the recommendation to have 3-6 months of living expenses in an emergency fund. It feels like a lot to set aside when it is already challenging to cover everyday expenses, but it acts as a sleep aid and stress reducer when there is no emergency and a life saver if there is. That’s why everyone recommends it. It helps make a bad situation better.
Yet, there is more to it than just having money set aside. Like the schoolhouse fire drills, there is more to it than just getting out of the building. It’s about planning so you know where the closest exit is, where to meet once outside, how to call emergency responders, how to “stop, drop and roll” if your clothes are on fire, call 911 and all the other things we hope to never have to do.
Having a financial fire drill is the same. It goes beyond setting aside money. It too requires planning. A little forethought goes a long way. Emotions run high when you hear a diagnosis, suffer a job loss or have an accident. Having thought through a plan and knowing what your options are can reduce costly mistakes. It can also free up precious time and energy for the many other priorities that often come with these situations.
A financial fire drill should include:
What money do you have available or access to should you need it?
What insurance do you have?
These usually include:
Health insurance for medical expenses, and may include dental and vision
Home and auto in case something happens to these key resources. At a minimum, they should include liability coverage for any damage to others you are responsible for as well as any physical property you may need to replace.
Disability insurance in case you can’t work for a period of time.
Life insurance to help anyone who financially depends on you in case of an untimely death.
What are the expenses you could go without if your regular income is disrupted?
These could include eating out, entertainment, social memberships, and anything that isn’t part of keeping a roof over your head and food on the table.
Do you have friends or family who could help you out?
My early life emergency plan was simple. Have a reliable car and enough food and gas money to get from wherever I was to my mom’s house in Minnesota. For me, it was like touching home base in a game of kick the can. As long as, I could get there, I’d be safe. Then I established my own home base and can now be that safe place for my kids and others if needed.
Do you have a trusted friend, family member or advisor who in a crisis can help you think through your financial moves? When we are in the heat of a nasty divorce or other stressful situation, the simple act of talking through your next moves may bring to light more options or keep you from making rushed decisions that could hurt you long-term.
If you are worried about your job, what skills and competencies do you have that could apply to other employers or industries? Are there other jobs you could do part-time while looking for your next full-time job? Job changes are big shifts even when planned so giving it some thought could soften the blow if it did occur.
If you think through what you'd do in a financial emergency, you are less likely to panic. As a result, you'll be in a better position to handle the situation.
Fire drills save human lives. Financial fire drills save financial lives.