Managing Finances Through a Crisis: Some saving strategies, planning strategies for specific crisis situations and tips on getting organized

Crisis situations can happen to anyone and planning for the worst is often your best defense. Here are some saving strategies, planning strategies for specific crisis situations and tips on getting organized, so you can financially prepare for a crisis.

Saving Strategies

While many crises are unexpected, a proper financial plan can help prevent a crisis from crippling your family’s finances. Start by developing a “cash flow statement” to track your expenses each month. Then compare your expenses to your monthly income. If you do this for several months, you will begin to understand your financial habits. You should track all of your monthly expenses, including fixed costs, such as rent, automobile and student loans, as well as variable expenses, like food, entertainment, and travel.

As a rule of thumb, plan on spending about 30 percent of your take-home pay on housing, and 20 percent on food. Pay for miscellaneous expenses, including commuting costs, student loans and other outstanding debts, from the remaining 50 percent.

Try to put between 5 and 10 percent of your earnings in an interest bearing savings account. And finally, take advantage of company benefits, such as a 401(k) plan. This will help to ensure your future financial security.

Managing Finances Through a Crisis

Emergency Fund
Families should have between three and six months of living expenses in a separate account for emergencies. Make sure you can easily withdraw money from this account if an unexpected crisis arises. It’s important to keep this fund separate from other savings earmarked for retirement or other long-range savings goals.

Clear Communication
It’s always smart to have a good working relationship with your attorney and financial advisor before a crisis occurs. Family members should know where important papers are kept including your will, property deeds, car titles, birth and marriage certificates, and the location and key to your safety deposit box, if you have one.

Planning Strategies

Sudden Death
If you die without a will, the court names an executor to distribute your assets. In many cases, the executor is a court administrator who gets paid from your estate. The court also selects a guardian for your children. If family members wage a custody battle over your kids, your estate pays the way.

In addition, the state allocates your property, and may divide your assets between your surviving spouse and children. Even if your spouse needs the children’s share to meet household expenses, he or she cannot obtain it.

Because of these reasons, it’s important to develop an estate plan. Contrary to popular opinion, estate planning is not just for wealthy people. Many middle income families underestimate their worth, and as a result, they fail to benefit from the proper estate plan.

Your estate includes your home and other real estate; stocks’bonds’ and other investments’ interest in a closely held business; as well as your car, jewelry, antiques, and other valuables. It also includes benefits from profit-sharing plans and the face value of your life insurance policies.

Here are three estate planning strategies that can help you to avoid financial hardship in case of a sudden death in your family.

  • Create a will.

A will is the most basic and most important element in estate planning. Your will should detail how and when to distribute your assets and who will manage your estate upon your death. If your children are minors, your will also should appoint legal guardians in case both you and your spouse die.

  • Take advantage of tax exemptions.

Structure your estate to take advantage of available tax exemptions. For estates under $10 million, presently the first $600,000 of assets is exempt from federal estate and gift tax. Upon your death, a Marital Deduction enables you to transfer an unlimited amount of property tax- free to your spouse. When your spouse dies, only $600,000 of assets in the estate is shielded from estate taxes.

Couples can minimize their estate taxes by shifting assets of up to $600,000 to one spouse. If one spouse dies, these assets could bypass the other spouse and go directly to other family members. This way, the surviving spouse’s estate does not exceed $600,000 and heirs could benefit from the doubling of the exemption amounts.

  • Reduce your taxable estate.

If you anticipate having more than $600,000 in assets, take the following steps to reduce your taxable estate and pass more wealth onto your family. If you establish a By-Pass Trust, you may pass assets directly onto your heirs. These assets are not included in the taxable estate of your spouse. A typical By-Pass Trust enables the widow or widower to receive income from the trust. At his or her death, the principal would pass to the children.You can give any number of individuals a gift of up to $10,000 a year (up to $20,000 a year if you make a joint gift with your spouse) without paying tax on your gifts.By establishing an Irrevocable Life Insurance Trust, you place your life insurance policy, and all control over it, to a trust and pay the premiums with “gifts” to the trust. Upon your death, the proceeds of the policy are paid to the trust. Your family can draw on the trust’s income for life and your beneficiaries can eventually obtain the remainder.

Medical Crises
Often people do not realize that some medical expenses are tax deductible. You may deduct some out-of-pocket medical costs that exceed 7.5 percent of your adjusted gross income (AGI).

Congress classifies tax-deductible medical expenses in four categories: 1) prevention, diagnosis, or alleviation of physical or mental defects or illness; 2) amounts paid for treatment affecting any structure or function of the body; 3) transportation primarily for and essential to medical care; and 4) accident and health insurance premiums.

Deductible expenses for medical and hospital services include fees paid to family physicians, dentists, chiropractors and other recognized medical practitioners. You also may deduct the portion of your hospital fees not covered by medical insurance.

In most cases, you also may deduct the cost of equipment and programs for mental and physical problems, expenses for prescription drugs and insulin, even the costs for traveling to doctors’ offices, hospitals, and special schools are deductible. You may deduct medical expenses paid on behalf of your spouse and your dependents, even if you cannot claim an exemption for that person.

To determine if you have the proper disability coverage, consider the disability benefits you have available from your employer, union, Social Security, and from other sources. Then, consider the following:

  • What is the amount of your total monthly benefit?
  • How long is the waiting period before disability benefits become available?
  • Do you have sufficient personal resources to meet your financial obligations during that waiting period?

Only disability insurance will protect against partial disability. So if you have a heart attack and must cut back your work schedule to part-time, you’ll need disability insurance that covers partial disability.

As with all insurance policies, you should review your disability coverage every year. A few key considerations:

  • Make sure you understand their definition of disability.
  • Insure 60 to70 percent of your current income. Lower amounts of coverage could make it difficult to meet ongoing expenses.
  • Make sure your policy includes an inflation guard and a guarantee of future insurability clause.

Natural Disaster
If a sudden, unexpected or unusual event, damages your property, you may have incurred a casualty loss and qualify for an itemized tax deduction. These events include lightning, storms, and fires.

You may deduct losses that exceed 10 percent of your adjusted gross income (AGI) in a given year. When estimating your property damage, you cannot simply deduct its replacement cost. For tax purposes, your loss is the lesser of the difference between the fair market value of the property immediately before and after the casualty, or the adjusted basis of the property before the casualty.

Generally, you must claim the loss on your tax return for the year in which your loss occurred. If you suffer property damage in a federally-declared disaster area, however, you may amend last year’s tax return to get an immediate tax refund.

Job Loss
Early retirees, displaced workers (who need additional training to re-enter the work force) and unemployed individuals experience this common crisis first hand. Job seekers may spend hundreds of dollars to find the job that’s best for them. That’s why it’s important to keep track of your job search expenses. You may deduct these expenses on your return by itemizing your costs on the miscellaneous section of your return, as long as your total miscellaneous deduction exceeds 2 percent of your adjusted gross income (AGI).

Job search costs may include transportation cost of job interviews and related appointments, career guidebooks, trade association memberships, and resume services. You also may deduct postage or shipping costs of resume, out-placement services, and fees for employment agencies or executive search firms.

There are limitations to the deductibility of these expenses, especially if you’re entering a new business. Be sure to consult your financial advisor before you file your return.

Six Ways to Make Ends Meet on One Income

  1. Slash insurance costs by raising deductibles on your homeowner’s and auto insurance policies. Drop collision coverage on a car that is paid for or more than 5 years old.
  2. Change your health insurance from a traditional indemnity plan to a plan offered by an HMO (Health Maintenance Organization) or similar organization.
  3. Watch your utility bills. Turn off lights and appliances that are not in use.
  4. Limit the number of credit cards you use to one or two, and keep consumer debts and credit card charges to a minimum.
  5. Join a car pool or take public transportation to work.
  6. Develop new spending habits. Curtail your entertainment costs by dining in more frequently. Instead of going to the movies, rent a video. Instead of buying books and CDs, take them out of the library.

Getting Organized

It’s important to keep a well-organized financial file of all your important records if you plan to deduct job search costs or apply for a small business loan or financial aid. Keep the following information on hand:

  • Canceled checks for the current year.
  • Credit card statements for the current year.
  • Receipts for major purchases.
  • Mortgage records, the originals.
  • Tax returns from the last three years.
  • Records of itemized deductions for the current year.
  • Insurance policies.
  • Loans and promissory notes.
  • Home office inventory.
  • Medical and dental bills.
  • Business receipts.
  • Stocksbonds and other investments.

If you were let go from your job, employed for at least three months, and your employer paid unemployment insurance, you may qualify for unemployment compensation. To apply, go to your local office of the Department of Labor (DOL), Unemployment Insurance Division. Be sure to bring the following:

  • Social Security card
  • Second form of ID
  • Proof of employment (wage stub, W-2 form or employee ID card)
  • Name and address of your former employers in the past 52 weeks
  • Number of weeks you worked and your earnings over the past 52 weeks

After you file the proper forms, your former employer will be sent an Employment and Wage Request Form. Your former employer has ten days to complete and return the form. Then your first check will be processed.

The amount you earn in unemployment is based on your former salary. When you receive your weekly check, you may notice that taxes are not withheld. Since unemployment compensation is considered part of taxable income, you must declare it as income on your tax return and pay tax accordingly.

The stress associated with job loss often is rooted in financial insecurity. To build a strong financial base, develop a savings and investment plan now. Start by taking stock of your current assets and existing debt. Then determine how much you can regularly contribute to a savings plan.

Popular savings and investment vehicles include Certificates of Deposit (CDs), life insurance policies, growth mutual funds, and U.S. Savings Bonds.

If you are offered an early retirement deal, evaluate it carefully. Here are some key considerations:

  1. Assess your job security, employment prospects and the future of your company.
  2. Assess the combination of benefits including your pension and other supplemental post- retirement benefits, like health insurance.
  3. Compare the package against your expected earnings if you stayed on the job.

To determine if you can afford to retire early, estimate your expenses and income during your post-employment years. Be sure to include Social Security benefits, your company pension, and any savings and investments you have earmarked for retirement. As a rule of thumb, most retirees need 70 to 80 percent of their pre-retirement salary to maintain their current standard of living.

Some companies offer lump-sum cash payments. Your salary and the number of years you worked often determine the amount of your cash payment. When evaluating this option, estimate how long it may take to find a comparable job before your cash runs out.

Also, be sure to consider the tax implications of accepting an early retirement offer. Your company must withhold 20 percent in taxes from lump-sum pension distributions unless you transfer the money directly to an ld 20 percent in taxes from lump-sum pension dis part-time, you’ll need disability insurance that covers partial disability.

As with all insurance policies, you should review your disability coverage every year. A few key considerations:

  • Make sure you understand their definition of disability.
  • Insure 60 to70 percent of your current income. Lower amounts of coverage could make it difficult to meet ongoing expenses.
  • Make sure your policy inclult your financial advisor before accepting an early retirement offer.Don’t get caught unprepared for life’s li
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