Brace yourself for financial crisis

With a booming economy and expectations that the stock market will continue

to perform well, many people may feel little need to plan for a financial

emergency. But good markets don't last forever, and even in a booming economy,

you or your spouse can lose a job. It happens.

A survey conducted this year by a major survey firm found that 55 percent

of Americans have no plans in place to deal with a personal financial emergency.

A devastating financial emergency can strike at any age or income level,

but those older than 65 and between ages 18 and 34 are particularly at risk,

according to the survey.

Potential financial emergencies include the loss of a job or business,

legal troubles, a serious illness or long-term disability, a divorce, a

natural disaster such as a fire or hurricane, or the sudden need to care

for an aging parent. Even something as small as a major car repair can tip

a family over the financial edge.

Here are some recommendations for preparing for the unexpected, from

Dennis Filangeri, a certified financial planner based in San Diego, Calif.:

Plan ahead.

Examine your household finances to see what you actually would be able

to do if something happened, such as a loss of income or large unexpected

expenses. How quickly could another family member find work? Do you have

easily accessible, penalty-free savings to tide you over? How about loan

sources such as home equity or a personal line of credit? Many families

simply choose to ignore even thinking about something going wrong — until

it happens.

Plan an emergency budget.

Establishing a regular budget or spending plan is a good idea for any

family. But you also might want to develop an emergency budget, based on

the minimum amount of income and expenses you would need to survive in the

event of a financial crisis. This means a bare-bones budget, covering such

things as mortgage or rent payments, transportation, clothing, food and

insurance premiums.

Obtain adequate insurance.

One of the front-line defenses against financial catastrophe is insurance.

Most people have life insurance, a homeowner's policy and auto insurance.

However, homeowners often don't have extra liability insurance, and renters

frequently overlook renter's insurance, which covers the loss of personal

property. Millions of people are not covered by medical insurance, even

when it's available and affordable. And most workers are not covered by

adequate amounts of disability insurance, which replaces a portion of income

lost because of a disabling injury or illness. Even fewer buy long-term

care insurance, either for themselves or their parents, despite the fact

that a nursing home stay can quickly deplete a family's savings.

Set up an emergency fund.

There is much debate, even among financial planners, about how large

an emergency fund you should have and where you should keep the money. Some

say you should have at least three months, six months, even a year's worth

of expenses reserved in a savings or money market account. Others don't

like to see too much tied up in low-yielding accounts.

To a large extent, the size of your emergency fund depends on your financial

circumstances. For example, if both spouses work in stable jobs with different

employers, the loss of a job by one of the spouses will have less impact

than if the family relies on a sole breadwinner. Having adequate insurance

and healthy investments lessens the pressure for a large emergency fund.

One piece of advice: Try not to rely on retirement accounts for emergencies

because of the tax bite (unless you take out your Roth IRA contributions)

and loss of tax-favored growth from withdrawals.

Consider loan sources.

Careful planning should reduce the need to borrow for an emergency.

But if you must borrow, keep the following points in mind. Establish a line

of credit in advance of financial problems. Once you lose a job, for example,

it's tough to get the line of credit. Consider using a home equity line

of credit, which is tax deductible, or a personal line of credit (a business

line of credit is tax deductible). Try to avoid borrowing from your Thrift

Savings Plan or life insurance cash values. Failure to repay could result

in a big tax bite. Also avoid credit card and payday loans — they're very

expensive.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance

writer based in Silver Spring, Md. He specializes in taxes, investing, business

and government workplace issues. He is a certified internal auditor and

a registered investment adviser. He can be reached at miltzall@starpower.net.