What happens when the money hits the proverbial fan??!

Rainy day savings

I wrote this very early Monday morning and then had HUGE internet problems! Trust me you don’t want me to start on the saga!! Anyway this post was referencing Sunday’s Sunday Star Times. I think it has survived the few days even if it isn’t quite so topical:)

http://www.stuff.co.nz/business/money/7200255/Kiwi-families-trapped-by-debt

I don’t know how many of you read this article in yesterday’s Sunday Star Times(SST), or read it on the Stuff website, but it makes scary reading.

There were lots of horrifying statistics eg. “What has buried so many families is the level of household debt. In 1980, it accounted for 47 per cent of a family’s disposable income. Today, the debt mountain is equivalent to 143 per cent of disposable income.” That’s some shocking statistic!

However, I’m going to focus on the sidebar piece, from the SST “Sudden health scare sends family to the edge” The couple featured had been earning $130,000pa so were not poor. However, they had a mortgage, had two cars, and were sending their 3 children to private schools so their outgoings pretty well took care of their income!

Then, the husband became ill and had to reduce his hours, so they were now having to pay those same outgoings on $600 less a week! Unsurprisingly they couldn’t do it. They borrowed from family and began to use their credit card, which was ” …kept for emergencies in case their children got sick or injured started to be used for the weekly groceries.” …and so they were, and still are, trapped in the debt cycle merry-go-round.

The debt is now so high that they really don’t have enough to really live on, and I’m sure, are having to rely on more borrowing. And sadly, so it will go on until either they earn more money, or reduce their outgoings. That is, plainly, hard!!

Now there is a lot of information is this sidebar and lots I could comment on, but I want to focus on the emergency plan being a credit card! Simply put, that is a disaster waiting to happen, especially as with this couple, the disaster was a serious reduction in income.

I advise all my clients to have three savings accounts, one for  Periodic savings, one for a safety net, and lastly and often later, one for investments.  The periodic savings account should be used for all those  payments that don’t occur monthly and even if you don’t know when they are required you know they will be. In this case “…if  the children got sick or injured…”. Now I don’t have children but my general knowledge, combined with my nursing background tells me that this is not an “if” but a “when”!! Another example is when the car breaks down, you don’t know when it will happen, but if you own a car you know that one day it will! Usually at the most inconvenient time too! As Federation of Family Budgeting Services chief executive Raewyn Fox said, “…. easy access to credit was a trap that too many people fell into, without giving thought to the future and something tipping the balance and leaving them in a financially dangerous position. They organise their finances so tightly that a little shock can be a major thing – the car died, the fridge breaks down or the house needs repair. People might have been sensibly paying the regular bills, they haven’t allowed for the irregular ones.”

My colleague, Mikelann Valterra wrote an excellent blog on periodic savings. You can read it here http://www.seattlemoneycoach.com/creating-gloriously-boring-savings-and-a-money-ninja-trick-to-pull-it-off

There are a couple of other things that I think this couple, and anyone reading this and identifying with them, could and should do. The first is get help early; as soon as you think you might be getting into trouble. Send me an email, or find another Financial Recovery℠ counsellor here http://www.financialrecovery.com/?p=find-by-area. Help is also available from a number of community organisations, eg Federation of Family Budgeting Services. The other one is to look into insurances. I cannot advise you on this at all, but there are a variety of people who can. I did however write a blog on my own personal experience https://jillporter.wordpress.com/2011/03/23/do-you-really-…tion-insurance.

So, if you haven’t already, at least set up a periodic savings account and regularly put money into it, so that when it does hit the fan, you are ready for it!

Do you have a periodic savings account? How do you operate it? Do you have a safety net account? How much do you think should be in that?