Things were unusually crowded at the local coffee shop as I rode by this week. Every seat, inside and out, was filled at what should have been a slow time.
It wasn’t a sale on coffee and Danish. It was free wireless Internet service in a town where more than half of the homes were without power as a result of the aftermath of Hurricane Irene.
Seeing a friend out front, I stopped for a chat. She was there working, with her son, a recent college graduate, surfing the Internet.
“It’s not that we’re out of power that’s the problem,” she said, “it’s that we’re out of work. Both of us. No power at the office, none expected until next week.”
The woman works as a receptionist, the son doing some back-room work at an insurance agency while he looks for something more permanent; both get paid by the hour. While mom should get paid for a few hours of phone-calling and rescheduling work done from home, her son was completely out of luck.
It’s not the kind of disaster or emergency that most people think of when they consider an event like a hurricane, but the loss of work for even a short period of time can be a very real problem.
A MetLife study in 2010 showed that nearly 60 percent of Americans are living paycheck-to-paycheck, and that 45 percent of people felt that they would be unable to meet their financial obligations if they were out of work for as much as a month.
While plenty of people still need to clean up after Hurricane Irene, everyone needs to be prepared for the next disaster, and needs to understand that catastrophic events are always, in their own ways, financial. Compared to physical devastation visible on the news reports, the financial problems may appear inconsequential.
But the financial effects also are the easiest ones to prepare for and avoid.
To do that, try a simple exercise: Set aside a paycheck, as if it’s not coming.
Missing a paycheck can help bring your personal situation into focus.
In short, stick the paycheck in a drawer and see how long you can go without needing the money.
If you can’t miss a pay period without feeling pinched or racking up debt – whether you get paid weekly, biweekly or monthly – you need to get a handle on where the money is going.
Credit and spending consultants frequently advise keeping a spending record to track where the money goes. Most people find such record-keeping to be a pain. But if you can’t survive a missed paycheck, you don’t need a spending record to know you have a spending problem.
To get the most out of a miss-the-paycheck test, don’t just see how well you made it through the period without the money. Answer the following questions:
• Do I have sufficient resources to weather a storm that lasts longer than this test?
A week or two is not a huge storm. A long layoff or disability is. If missing a pay period had you feeling tapped out or, worse, added to your credit card debt, you need to expand your cushion.
The good news is that if you can survive the week with the paycheck in the drawer, you could get by putting that money into an emergency account, increasing your cushion to protect against any real problems in your future.
• Could I better match my cash flow and my bills?
For many people, spending and savings woes are a function of when the money arrives and when it goes out. If all of the bills are lumped together at one time of month, for example, they tend to feel crunched as the due date draws near. Companies may be willing to adjust the timing of bills.
• What expenses could I trim, to help me pass this test more easily next time?
If you can’t put the paycheck in a drawer and go a full pay period without cashing it in, take a look at where the money goes and see what you can live without.
• How far ahead of my expenses can I get?
Financial advisers have varying advice on how big of an emergency fund to keep. In these times, when income may be in question but also when the stock market is making investors nervous, bigger is better. If there is any fear for your employment, or if you need a cushion to have the peace of mind not to panic out of the market, then keeping six months of expenses safe makes sense.
• If I can survive without one paycheck, what’s stopping me from increasing my savings?
Compared to missing an entire paycheck, setting aside a few bucks each week into a retirement account or an emergency fund should be a piece of cake. If you can afford to do it, your next financial problem might not feel so much like an emergency.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
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