Building an emergency fund is key, as is making sure that both partners in any marriage have a clear understanding of the couple's finances.
It’s easy to plan for the things we’re looking forward to. Want to save up for a nice vacation? It may take some discipline and dedication, but it can be nice to think about, and thinking about saving money is the first step to saving it. It might not be easy, but every time you get discouraged, you can just picture yourself on a beach, sipping a drink from a coconut with a little umbrella in it and redouble your efforts.
But it’s much harder to motivate yourself to think about the bad stuff in life, let alone actually translate those thoughts into action. We don’t want to consider the possibility that negative life events like financial emergencies, divorce or even death, are going to happen. But they very much can. In fact, they’re extremely common! And the last one is guaranteed!
And as bad as any costly emergency or divorce can be, they’ll be so much worse if you aren’t prepared for them. So how can you prepare for the things you’d rather forget about?
Take things one step at a time.
Before we get into the specifics of how to plan for specific tragic life events, it’s important to make sure you’re in the right mindset. And that could mean sometimes taking a little break.
“First, I think it’s important to recognize that we are all a little weird when it comes to money,” began Derek Hagen, founder of Hagen Financial. “And that’s even when we are thinking about the happy parts of money. We get more uncomfortable talking about money than we do about politics, sex, and religion. So it’s natural that we get really uncomfortable when we think about areas where something might go wrong or where we failed.
“As uncomfortable as it is, it’s important to try and talk about these topics, with our spouses, partners, children, parents, or anyone who would be involved if something happened. Starting the conversation is step one. Try to separate emotions from these financial decisions. We don’t want to talk about our death because it’s uncomfortable, but ignoring it could lead to far more stress for our heirs.
“When having money conversations, try to recognize when you are about to feel emotional flooding. When we talk about stressful situations there comes a time when our ‘logical brain’ shuts off and we speak with our ‘emotional brain’ only. To avoid this, try taking 20-30 minute breaks when you feel this is about to happen. Respect and encourage others who suggest taking a break as well, since they will want to avoid emotional flooding, as well.”
OK. Now you’re in the right mindset and you’re going to take breaks when necessary. Let’s start with some general emergency planning advice.
How to start building your emergency fund.
An emergency fund is a good step to have regardless of what kind of life event may come your way. Having one in place means that you can do what needs to be done during an emergency without having to worry as much about the cost.
“You need an emergency fund in case of an emergency, such as losing your job or having big unexpected medical or other bills,” advised Eric Meermann, certified financial planner (CFP), enrolled agent (EA), and vice president of Palisades Hudson Financial Group.
“First, create a budget and track your monthly living expenses. Remove non-essential expenses that you would go without in the event of an emergency, such as losing your job. This will help you determine how much you need to have in your emergency fund. Typically, your emergency cash reserve should be able to cover at least six months of anticipated living expenses, and as much as 12 months if you are the sole income earner in your household, are concerned about job security, or are self-employed.
“Open a separate bank account from your primary checking account, such as an online savings account, for your emergency fund. You want to have access on short notice, while avoiding the temptation to use these savings for non-emergencies. Most importantly, your emergency fund should not be invested in the stocks or bonds to avoid the risk that it could decline in value when you need to use it. Also avoid putting your fund in a CD because you don’t want to incur costly penalties if you need to access the money before the CD matures.
“Put your emergency fund contributions on auto-pilot by setting up recurring monthly transfers from your checking account to your savings account. If the transfers occur automatically, you are more likely to reach your savings target faster than if you leave it up to yourself to fund the account without wavering.”
A well-stocked emergency fund will help you through any number of different stressful situations. However, there’s one area where it won’t be that much use at all: divorce.
To prevent a messy divorce, both partners need to know the financials.
While divorce might not be as scary as death, it can be even harder to discuss with your partner. After all, why would you even bring it up, especially if things are going well?!
But no one gets married with the plan to get divorced. That’s why it can be a good idea to discuss stuff like prenups when things are going well and you’re both deeply, madly in love rather than risk having to hammer out those sorts of details if things get rocky.
It’s also important that shared finances get shared attention.
“As a Certified Divorce Financial Analyst (TM), the biggest mistake I see with clients is not having a grasp of their financials: both the daily expenses as well as the investments,” warned Certified Divorce Financial Analyst Jennifer Jank.
“One spouse typically either handles them all, or one handles the daily and the other handles investments. Both spouses need to understand their household income and expenses, as well as the balances of investment accounts (including retirement accounts) and how they’re invested. Then when the divorce happens (or the spouse’s death happens), the less knowledgeable partner is blindsided by everything they don’t know.”
Financial advisor Rosemary Frank echoed and expanded on that sentiment: “The most comprehensive way to prepare financially for divorce is to fully participate in the household finances. Know what is going on. A recent survey by UBS revealed that 98% of all divorced women say they wish they had known more about what their husbands were doing with the finances. If he ‘won’t let you’ participate, you are more ready for divorce than you may realize. Financial abuse is rampant. The same research shows that millennials are much more likely to surrender financial responsibilities to husbands than boomers. This is shocking.”
Hopefully you’ll take those steps before a divorce happens. But there are also considerations to make post-divorce, as Mark Charnet, founder and CEO of American Prosperity Group, told us:
“After a divorce, the individual must analyze where they currently are relative to a projected retirement date, determine assets on hand, risk tolerance and available recurring capital to direct to retirement plans. Even though the divorcee potentially lost half of their retirement plan in the divorce, they also lost a portion of the expense to pay for the now ex-spouses retirement needs. More discipline is required to pay yourself first, live on less today in order to have more in retirement, and to carefully monitor the retirement plan statements for any buying opportunities. With a religious fervor, contributions must be increased and accelerated to take advantage of ‘dollar cost averaging,’ the opportunity to purchase with a lesser average cost than the average price over time.”
Nobody likes preparing for the worst. But for those who take the time do that prep, their worst isn’t quite as worse as everyone else’s.
Mark Charnet, founder and CEO of American Prosperity Group, has been in the retirement and financial estate planning field for over 35 years. Mark has numerous certifications and credentials, including Life and Health Insurance, Certified Annuity Specialist and FINRA Series 6, 63, and 65 Securities Licenses. APG’s unique approach to retirement and legacy planning allows clients to retire with confidence.
Rosemary Frank is the Principal of Rosemary Frank Financial, LLC, a fee-only Registered Investment Adviser. As such, she provides services in the areas of wealth management, divorce financial consulting, and other attorney support services. Bound by the fiduciary standard, she always puts the client’s best interests ahead of all other considerations.
Derek Hagen is the founder of Hagen Financial, LLC, a financial coaching and counseling firm that helps clients develop a healthy relationship with money and find the motivation to change their behavior. He is the founder of the Money Health blog which helps readers increase their financial health. Derek holds the Certified Financial Planner™ and Chartered Financial Analyst designations. In his free time, he enjoys all things outdoors, especially camping, hiking, and running.
Jennifer “JJ” Jank focuses on women and their financial needs, and her goal is to empower women through financial education, including divorce financial analysis. She is a CERTIFIED FINANCIAL PLANNER™ and a Certified Divorce Financial Analyst® professional. She can be found on the internet through either of her website www.FabFemFinance.com.
Eric Meermann, CFP®, CVA, EA, is the senior client service executive in the Stamford office of Palisades Hudson Financial Group (@palisadeshudson), where he supervises the staff of client service professionals. As a vice president, he is also responsible for firm-wide professional staff development, as well as serving clients in the Northeast and across the country.
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