NY Times had an article about what would happen if you or your spouse lost your job. They discuss a book written by bankruptcy expert Elizabeth Warren and her daughter Amelia Tyagi. In the book “The Two Income Trap” they suggest conducting a fire drill to see what would happen. McKinley Money also suggests this as a part of their financial planning. The article goes on to offer 3 areas for budget readjustment. Here is my take on it.

Start with spending – This is the no brainer first place to go. Say goodbye to those Starbucks runs and getting the medium size at Wendy’s. Cable bill? You don’t need TV keeping you away from your job hunt. Want internet? Go to the library (that place with books) or Panera Bread. You need to transition from being a spender to being a saver.

Consider borrowing next – The suggestion here is that instead of tapping into your emergency fund, you look towards credit cards, friends, family, and the spouse’s 401k’s to stop the financial leaking. While I agree that keeping cash is very crucial, going into this well can present a whole new host of problems. If your spouse loses their job, that 401k loan will need to be paid back immediately. Above all, most of these will only add to debt or put a physical strain on personal relationships. I’m not a big fan of this strategy.

Empty the assets – This is where you empty out all your savings vehicles. Roth IRA’s are good because there is no penalty on the money you put in (you already paid taxes remember?). Stocks, bonds, and mutual funds should also be tapped into. If you own a house and it’ worth more than your mortgage, you might want to consider selling if times do get rough. Avoiding debt when you don’t have a job is key, although selling your house should be a last resort. It’s probably also not a good time to think of how much you’ve lost on paper with these investments, just get the cash.

Having a financial fire drill is a really good idea and with the economy and recession we are in, there is no better time to start than now. My biggest comment about the article is downplaying the emergency fund. Hopefully everyone has at least 3 months of cash available to cover expenses. There was also no mention of unemployment, which will put some cash in your pocket and keep creditors away while you find a replacement job (or jobs).

Stop, drop, and roll your way through a financial fire drill today. Smokey Bear will be proud.