The Two-Income Trap - Elizabeth Warren [85]
Lurking in these words is a piece of corollary advice to the family shopping for a home: Don’t stretch yourself to buy a house you can’t afford. If the only way you can meet the mortgage payments for your dream home is to tighten your belt and commit both incomes, don’t do it. The fact that you have been approved for a mortgage is no guarantee that you can actually afford it. As painful as it may be, it is wiser to rent for a few more years or to buy a smaller home. That oversized mortgage will leave you with no room for error, no cash for even minor emergencies—let alone a real disaster.
There is a silver lining to all this abstemious advice. It is okay to splurge on extras. Never mind the dour looks from the Over-Consumption camp. So long as you are staying out of debt and putting something away in savings, you should feel free to buy the kids a new pair of Nikes or treat yourself to a night on the town. If the tough times come, you can drop those expenditures in a heartbeat. As long as your fixed expenses are low enough that you can manage during a crisis, then you can count yourself secure enough to go ahead and have some fun.
3. What is your emergency backup plan? Now is the time for the painful game of “what-ifs.” What if your husband loses his job? What if grandma’s health fails? What if your own health fails? What if you and your spouse split up? The point of this litany is not to send you running for the aspirin bottle, but to help you be prepared if the unthinkable happens. As difficult as it may be, you need to make a plan and to consider what could be done now to make that plan feasible. Add a separate line to your budget for these just-in-case safety precautions.
The emergency backup plan may cause you to rethink some of your financial commitments. Pay particular attention to timing. In finances, long-term commitments are the most dangerous kind. Sometimes they are unavoidable, such as when you buy a home or go to college. But whenever possible, go for a shorter commitment, since that will give you what you most need in times of trouble—flexibility. So, for example, choose a 36-month car loan instead of a 60-month commitment. If that drives the payment up too high, then heed the warning: You cannot afford this car, and you should opt for something cheaper. Once you pay off this car, hang on to it for an extra year or two and keep making payments to yourself. After two or three times around, you can pay for your car in advance, giving yourself that much more flexibility in your budget. Details may vary on any loan, but think of every long-term commitment in terms of walking a tightrope—so long as your family is on the rope, there is a risk of disaster. Take the shortest walks you can.
You should also assess your insurance coverage. Should you purchase a disability insurance policy, just in case? Should you beef up your life insurance policy? Talk with your parents about their plans. Can you help them buy long-term care insurance? Perhaps your siblings could help out as well. Long-term care insurance can give several families—your own, your parents’ and your siblings’—a better chance of surviving financially if your parents need daily assistance. When everyone is healthy, the thought of disability can seem like a remote possibility, a bad dream that strikes others, not busy families with young children. But the fact remains: Medical problems send three-quarters of a million families to the bankruptcy courts each year. So think about more insurance. If you never use it, then count yourself lucky.
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