There are a few ideas and terms that the masses throw around in an effort to mitigate risk and be more financially secure. The terms that come to mind are emergency fund and diversification. While these are valid concepts, I don’t think they complete the picture of financial security that we should all strive towards.
Most people would agree that economically, we’re in better shape now than a year ago. While we can debate to what degree, I think it would be wise for us to assume that we’re not better off. We should assume that we’re still in the middle of a recession (we probably are), and that things could still get worse. Furthermore, we should assume that it is very likely that we lose our job or lose our income in the near future. If not a complete income loss, we could easily see an income reduction as business revenues and sales continue to struggle.
I’m not here to convince you that these things are going to happen, but rather to convince you to prepare for the event in which they do. If things turn for the better, the economy improves, and your income increases, then great! If not, hopefully you’ll be prepared. So, what to do?
Redefining the Emergency Fund
Most people understand the purpose of an emergency fund: to save up a chunk of money that can pay for our expenses in the event of income loss or a major unexpected expense. By establishing an emergency fund, you can pay your bills and buy groceries with this fund versus tapping a credit card. This is a smart strategy, but I believe there should be more to it.
Storing supplies and consumable goods should also be a part of your emergency “fund”. Your emergency fund is used to pay for stuff when you can’t afford it. If you prepare accordingly, you can use your funds to pay the bills, but hit up your supply stash for products like toiletries, food, canned drinks, etc. The combination of emergency funds and emergency supplies means you can last longer on your own in the event of a loss of income. Furthermore, using your stored supplies for things like food will prevent you from going out to dinner when you should be saving your money during this phase. Lastly, your storage supplies can double as emergency supplies in the event of a disaster or supply shortage. By adding supplies to your emergency fund, you are increasing both your financial security and your independence; a winning proposition in my opinion.
Diversification of Income
We love to spout the fancy term diversification over and over when we’re referring to our investments, yet most of us go through life being completely non-diversified with regards to our most important financial asset: our income. The simple fact is that too many people rely entirely on a single income and are unprepared for the possibility of an income decrease or elimination. In addition to preparing a robust emergency fund as described above, a second prudent step (especially over the long-term) is to diversify our income.
While employed and making money, it’s important to spend some of your free time working on the development of a second income stream. While everybody would agree that such an idea is a wise strategy, probably less than 5% of people actually act on it. I guess television is too enticing.
To start the process, take an inventory of the skills or tools that you possess. Maybe you have excellent graphic design skills, or you can do a range of household repairs, or maybe you have quality lawn equipment. Next, analyze your contacts that might help you get going on this income/business venture. Who might be potential customers? Who might help you find additional customers?
Growing an alternative income stream takes hard work, and will be much slower than you think since you’re spending your limited free time working on it, but I believe it is a worthwhile process. Be organized, determined and patient. Over time, you will see results.
The great thing about working on a second income stream is that it has the potential to eventually turn into a thriving business. It is a less risky form of becoming an entrepreneur. Even if it doesn’t grow into a huge business, the additional income will help boost your savings and help you survive if you lose your main income.
Financial security is a topic that we should all take more time to thoroughly discuss. I have severe doubts about the years ahead with regards to the U.S. economy; as such, I’m doing what I can to prepare for whatever situations I’m forced to encounter. If I’m wrong on my economic views, I’ll still be in great shape with a few extra dollars in the bank and maybe some stocked closets full of goods to use. Such a conclusion would hardly be a bad one. I strongly believe we should prepare for the worst and hope for the best. When it comes to your finances, this old cliché is definitely applicable.
What are some of the ways you’re improving your financial security?