A Firefighter's Guide to Financial Preparedness
Emergencies are the standard in our line of work.
"Routine" emergencies excite us about as much as a vegan at an all you can eat wing night. Hooray for celery.
And why is that?
Because we are prepared for them.
Our education, training, and real-world experience helps us to evaluate the situation, execute a plan, and overcome obstacles in the process.
We pre-plan businesses. We train on tactics. We do our best to identify hazards before an incident. And all that prep work keeps us well prepared for chaos.
Preparedness is of vital importance in our professional lives, and it is equally important within your personal life. And this is particularly true regarding your personal finances.
If you were ill-prepared to deal with financial stressors brought on by the COVID-19 pandemic and the ensuring economic uncertainties, I am empathetic to your situation.
But, as the saying goes: fool me once, shame on you. Fool me twice, shame on me.
Don't be a fool when it comes to being prepared for uncertain economic times.
So, if you've been financially affected by our current economic uncertainties, please start preparing now for the next "emergency".
And you should start with your budget...
Cash flow is the fuel that moves your economic engine. If you spend more than you make, you will always live on the edge of chaos.
Operating your household on a monthly budget ensures you spend less than you make, which allows you to direct excess cash flow towards accomplishing financial goals.
And your first goal should be...
To Become debt-free.
Maintaining revolving debt—especially high-interest credit card debt—fragilizes you to economic volatility. If your income is reduced and you can't make your debt payments, it is only a matter of time before the collectors come-a-knockin'.
I recommend utilizing the debt-snowball method to pay off your debt. It's simple, and it works. You list your debts from smallest to largest (except your home), pay minimums on all but the smallest, and you put every last penny you can find towards the smallest debt.
Once that debt is paid off, you roll the entire payment (plus the minimum you were already paying) into the next debt. Eventually, that snowball gains so much momentum that you will be destroying debt at an unstoppable pace.
Once you've become debt-free, you are on your way to becoming financially resilient.
And to become financially resilient, you must be prepared for emergencies.
So, you must maintain a healthy emergency fund.
An emergency fund shields you from financial chaos. The typical recommendation is to maintain emergency reserves in the ballpark of three to six months of your household expenses.
It may be redundant to have months of expenses in a low-interest savings account, but your goal is not to get a return on this investment. In fact, it is not an investment at all.
Your emergency fund is an insurance policy from day to day chaos. So, keep it liquid and accessible.
We don't show up to a working fire with only one hose on one engine. We have multiple hoses of the same and differing diameters and multiple apparatuses with differing capabilities. Is it redundant to have three engines show up on a house fire when all you needed was one and some manpower? Yes, but that is the point.
Having emergency reserves keeps you from flirting with disaster if your initial plan of attack hits a dead end.
Now that you are shielded from financial chaos, you can plan for financial freedom.
You aren't going to get rich renting out your time. You need to invest in financial assets—businesses, properties, stocks, bonds, etc.—that can earn and grow as you sleep.
So, create a plan to reach financial freedom by investing in these types of assets.
That means to be financially free, you would need an amount of money that could sustain your lifestyle by withdrawing 4% of the value year over year.
For example, if you had a $1,000,000 portfolio, you could safely withdraw 4% of your assets year over year and (most likely) not risk running out of money. So, that means you'd have to be able to live on $40,000 per year.
So, guesstimate your future yearly expenses multiply that number by 25, and you've got your financial freedom number.
Now you can enter your info into an investment calculator—like this one—and calculate the amount you need to be investing to reach financial freedom.
(If you don't feel comfortable selecting investments, consult a fee-only fiduciary financial advisor for help.)
Now that you have a plan for financial freedom, you need to pre-plan for financial volatility.
We pre-plan businesses all the time. Why do we do this? So, we can be better prepared to deal with an emergency when it occurs.
You should be doing this with your finances and your investments.
Economic downturns are about as sure as anything. We don't know when they will happen, but we do know they will happen.
This will force you to think about and plan for these events.
So, let's imagine your portfolio value dropped by 30% overnight, how would you feel? Do you need that money now? Is it going to affect your day-to-day?
For folks in the accumulation phase (i.e., pre-retirement), you should probably just stay put, weather the storm, and continue investing per your plan. Try to view it as if everything just went on sale. If it was leather lids we were talking about, you'd be ecstatic.
If you're close to retirement or in retirement, a 30% drop could be much scarier.
So, think about this before it happens. I typically suggest that those close to retirement or in retirement begin saving up a "war chest" for times like these.
A war chest is 3-5 years of income saved in cash and bonds. This allows you to keep the rest of your money invested for long term growth through the ups and downs of volatile markets.
(Again, consult a financial advisor if you need help planning for these scenarios.)
Financial emergencies, economic downturns, and stressful markets are sure to happen. Don't allow the boom to lull you to sleep while the bust is waiting in the shadows.
Establish a solid financial foundation by spending less than you make, paying off your debt, establishing an emergency fund, planning for financial freedom, and pre-planning for economic volatility.
If you follow these few principles, you can handle just about anything our global economy throws at you.
Disclaimer: All written content on this site is for information purposes only. Opinions expressed herein are solely those of the author, unless otherwise specifically cited. Material presented is believed to be from reliable sources, and no representations are made by the author as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.