Those of us prone to financial daydreaming spend a lot of time on the lottery fantasy. We create elaborate Excel spreadsheets in our head sorting what we would buy if we won, whom we would help and when we'd retire. But few people spend enough time imagining the nightmare case.
As Elizabeth Warren, a Harvard University bankruptcy expert, and her daughter, Amelia Warren Tyagi, note in their book, "The Two Income Trap," disaster is the defining theme in the financial lives of millions of Americans.
So forget about the jackpot for a moment and consider its opposite. The authors suggest conducting a financial fire drill, in which you plot how you'd face down the worst-case scenarios.
They're not the only ones recommending such an exercise. The drill has become a component of Kevin McKinley's financial planning process at his firm, McKinley Money in Eau Claire, Wis.
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What follows is some guidance for conducting your own financial fire drill. McKinley has a number of eyebrow-raising suggestions. They include borrowing before using up savings, using any accumulated assets to pay the loans back as slowly as possible.
For a gut check, I also turned to Kathy Santos. A 53-year-old Web designer who lives in Pepperell, Mass., Santos spoke about diversifying her income through freelance projects and work as an emergency medical technician. The next month, she lost her full-time job and had to quickly consider her own financial disaster plan.
Most people in financial trouble would be inclined to turn to their emergency funds first, before taking on new debt. But the financial fire drill is planning for extreme circumstances, which means that most of the following advice is not intended for everyday use:
START WITH SPENDING: An obvious first step in the fire drill is to contemplate how you'd cut back spending if all or part of your income disappeared. Scaling back before the worst happens makes intuitive sense, though many people can't bring themselves to downgrade their lifestyle unless they absolutely have to.
The pain of a collapse in income, however, would be much less if you had already excised some of the extras that turned up in the drill.
"It's a leveraged advantage to cut spending," McKinley said. "Not only do you live on less, but you accumulate more to serve as a safety net."
The list of budgetary line items to consider should be familiar enough by now -- eating out, vacations, household utilities and the like. But McKinley tends to focus on automobiles, an area that doesn't come up as often.
"People who have their heads on straight about money typically have little or no car payments," he said. "They drive cars until they drop."
McKinley, who drives a 2003 Honda Pilot with 80,000 miles on it, suggests flares, blankets and a backup cell phone for those who worry about car trouble.
Santos and her husband seem like guilty parties here because they have three cars. Indeed, selling her husband's sports car was first on her fire drill list.
CONSIDER BORROWING: McKinley's most radical notion is to use the drill to assess your borrowing capacity. You do that in anticipation of taking out loans before spending much savings.
"You borrow money when you can get it, then pay it back out of assets as slowly as possible," he said.
The logic here is that available credit, whether it's a home equity line or credit cards, can disappear at any moment. It's vanishing, in fact, with increasing frequency for all sorts of people who are still employed. So if it's clear that your financial situation is dire, the theory goes, better to tap the credit while you can.
For instance, if you have a $2,000 car repair, McKinley might suggest that you put that on a credit card rather than take the money out of savings, even though he admits that it might be frightening to take on debt when your income has shrunk or evaporated.
"You can still pay that off more slowly and then, when you're back on your feet, pay the full balance," he said. "Meanwhile, you still have the $2,000 in the bank and a working vehicle."
Here's another bit of fancy footwork he'd suggest considering in your drill, keeping in mind once again that this is an only-if-necessary plan.
If you have a working spouse, you could borrow twice as much money from the spouse's 401(k) as you think you'll need for living expenses. Pay it back slowly, as you would with the credit card. Then, if at some point your spouse is out of work, too, at least you have the money you need in addition to money left over to pay taxes and penalties you may be assessed if your spouse's employer demands immediate loan repayment and you can't comply. Once your spouse lost the job, after all, you probably wouldn't be able to borrow against the 401(k) anymore.
These sorts of moves assume a couple of things. First, that you have savings in the first place with which to repay the loans.
Second, that you'll find a new job soon that will allow you to pay back the debt quickly.
If either one of these things isn't true, then borrowing from your family can be a decent first move.
EMPTY THE ASSETS: If you turn to your savings, McKinley suggests adjusting your asset allocation so that your investments are much more conservative. After all, you don't want your mutual funds plummeting while you are also out of work.
McKinley, by his own admission, tends to work with what he calls middle-class millionaires. These are unflashy working people who have salted away enough over the years that they can pick and choose among strategies when trying to survive a long interruption in income.
When I asked Santos about how her own financial fire drill accounted for her assets, she chuckled. "The only time I ever owned stock is when a company gave it to me," she said.
For those fortunate enough to have some savings, McKinley notes that a Roth IRA is a good account to tap, because you can generally withdraw your initial contributions (though not your earnings) before retirement without taxes and penalties. He suggests breaking into college savings accounts, too, if necessary, even if there are taxes and penalties.
The biggest asset in most households, however, is a home. If yours is worth less than what you owe on the mortgage, your options might be limited if your income were to disappear. Santos and her husband have some equity in their home, and their fire drill led them to the conclusion that they might need to sell or rent their house and move someplace cheaper.
WHO SHOULD DRILL: Driving old cars, running up credit cards, letting someone else live in your home -- imagining it all is so disconcerting that the anxiety it produces hardly seems worthwhile.
McKinley said some groups of people tended to be comfortable with unpredictable income, like farmers or business owners who are used to good months and bad months. People who are used to steady income, however, need to consider how jarring it would be if it suddenly stopped.
"The fire drill allows you to take control, to say, 'I've figured this out already' and not just be trembling at the computer terminal," he said.
"The trouble is, people don't think about the fact that their financial situation can change really quickly," Santos added.
Then again, it can swing quickly in a better direction, too.
Just as Santos was down to her last day of severance pay and leftover vacation days, she got word that the Massachusetts Audubon Society wanted to hire her full time.
So she avoided the worst-case situation of zero income and won't be needing the plan that emerged from her fire drill. Not yet, at least.