Do you know how long you could survive if you or a spouse lost your job? What if you are like me and are the lone income provider – how long could your family live on savings alone? If you are not sure about the answers to these questions it is probably a good idea to conduct a financial fire drill.

The concept of a financial fire drill is based on the idea behind a real fire drill. It allows you to run through a real emergency before you have to act with smoke and flames. In the case of a financial fire drill, this means you will simulate a “what if” scenario so you’ll know what to do, and what things need to improve, before a real life financial emergency strikes.

Steps to Planning a Financial “Fire Drill”

1. Include the entire family. My family has a pretty good emergency plan. We all know where to meet in case a fire separates us in the middle of the night. We have a rendezvous point established for larger-scale emergencies, and even the kids are aware of actions to take based on various types of disasters. Similarly, the entire family should also be involved with a financial fire drill.

2. Gather a list of necessary expenses. These expenses are absolute necessities, so things like mortgage payments or rent, basic utilities like water, power, etc. (cable and Netflix memberships don’t count), and other basic expenses related to food, shelter, prescriptions, etc. Nothing else matters at this point.

3. Determine how much is in your “extended emergency fund.” A basic emergency fund is a pile of cash stored in an online savings account or local credit union. A typical goal for emergency funds is to save six months of household expenses just for emergencies. However, in a large emergency such as a job layoff or medical disability, you could likely tap other resources. Be sure to include any stocks or mutual funds not held in retirement, CDs (even if you had to pay a penalty), bonds and any other assets that could be converted to cash quickly. This total amount will represent your “extended emergency fund.”

4. Determine your maximum survivability (in months). Divide the amount of your extended emergency fund by the total expenses identified in step 2. This number represents the months you could survive without an income. For instance, let’s assume an average family of four needs about $2,000 a month to cover their mortgage, basic utility payments and food. If the same family has a $17,000 extended emergency fund, they could expect to make it about 8.5 months on savings.

5. Adjust for increased expenses. Unfortunately, expenses don’t always go down in an emergency. In fact, they rarely do go down, despite your best efforts to cut expenses to the bone. Things like continued health insurance premiums under COBRA, or other medical expenses, can cause spikes in spending categories otherwise in check. Make adjustments to your prediction based on these estimates. To show how much impact these “surprise expenses” can have, in our example above the same family could only survive five months or so with a $1,000 COBRA premium added to their $2,000 in household expenses.

6. Conduct a financial fire drill regularly. Armed with all the facts and figures required, it’s time to pull the alarm and practice getting out safely. Since laying yourself off is not exactly a smart idea, it is sufficient to simply pretend you just received your last paycheck. What expenses would you immediately target to be cut? Write them down, along with customer service phone numbers and terms. Repeat this exercise once a quarter or so and update your list accordingly.

The day you are laid off you may grab your list and make phone calls to the newspaper subscription department, your gym, your lawn service guy, Netflix, and the cable company. These moves alone could save you a couple hundred dollars a month in expenses not necessary to your survival, preserving precious emergency funds. Keep this list handy, and only break it in an emergency.

None of these steps will happen on their own. You must be proactive. Force yourself to sit down and run the numbers. If you don’t know how much COBRA might cost, find out. If you don’t know how much your health insurance plan’s deductible is under a major medical event, find out. Don’t wait until your exit interview to discover these new costs. Doing so would be like waiting until smelling smoke to map out an escape route.

This article appeared in the Frugal Living Blog Carnival on 9/4/2009

It’s a good idea to keep a little cash in your home for emergencies. How much you decide to keep is up to you, but I would suggest keeping enough cash on hand to pay for a week of groceries, and maybe a night or two in a hotel. Because this money will not be earning interest, and is subject to being stolen by a burglar, I don’t suggest keeping a huge stash in your home. In addition to a small amount hidden at home, I also stash cash in our online savings account (my ING Direct review) to put a little distance between me and some of our savings. Think of it as an offsite backup disaster recovery plan.

When you’ve settled on an amount you should think about secret hiding places to stash the cash. We’ve all seen those spy movies where the guy removes the tile from the back splash behind his stove and pulls out a cache of bills, passports and ammo. Well, the following ideas may not be worthy of James Bond, but they will improve the chances of your money surviving a break in.

Seven Secret Hiding Places for Your Cash

1. In the freezer wrapped in aluminum foil. Save a little styrofoam from the next pack of meat you buy and cut it down to the size of a couple large steaks. Put your cash in a Ziploc bag, stick it between two pieces of the used meat tray and wrap it in aluminum foil. Take a piece of masking tape and write “Scraps – 05/22/2005.” Robbers are not likely to look through the pack, and if they pull back the foil they’ll only see the familiar styrofoam tray and stop.

2. Sandwiched between the cardboard backing of a hard-to-reach picture frame. Most thieves pull back pictures from the wall to see if money is taped to the back, but they aren’t likely to take the time to look behind the glass, the cardboard backing and the picture itself. Use a pen knife to split the cardboard backing into two halves and sandwich the cash in between.

3. Under a piano, entertainment center or anything weighing a couple hundred pounds or more. If you have a hand truck around the house it’s pretty easy to just lift up the corner of a piano and slide an envelope under it. However, a burglar probably won’t be able to lift something this heavy, and would spend his time digging through the drawers or inside of the furniture rather than trying to lift it.

4. Inside a used can of soup. The next time you have soup, open the bottom of the can to empty the contents and the leave the top in tact. Rinse the can thoroughly, then use it to cover your stash of cash hidden inside your pantry. Stack a few cans of soup on top just to make it less convenient for someone to pick it up out of curiosity.

5. Buried in the “soil” of a fake plant. If you have a fake plant, or small tree, in your home, wrap your cash in a Ziploc bag and nest it inside the “soil” of the plant.

6. In hollowed out pages of a book on your book shelf. Using a pen knife or box cutter, carve out a few pages of your least favorite title. Hide your cash inside the book and return it to the book shelf.

7. Inside a kid’s toy hidden in their closet. Kid’s rooms are notoriously messy, and kids are not known for having large sums of money. Take apart an old plastic toy they no longer play with and hide your stash of cash in there. Return the toy to the bottom of the pile of toys in your kids closet, or toy chest, and it should be safe.

It’s important to remember that any cash saved at home could be lost in a fire or natural disaster. The ultimate hiding place is a fireproof safe bolted to the floor, and even that isn’t fool-proof. The ideal spot for storing large amounts of cash is an online savings account, far away from your house and any potential danger. But for the small amounts you stash at home, take the time to put it out of sight.

Also, remember to tell a spouse or close friend about the money in case you are not able to get to it (you die, or become injured or ill and cannot communicate). Keep enough cash on hand to cover you a few days in a major emergency, but not so much that you’d be completely wiped out if it all disappeared.

My wife and I have been married for over eleven years now. When we first married we were complete opposites on all things financial. I am, by nature, a saver. My wife is the free spirit, or the spender, in our relationship. In an effort to keep things civil those first few years I spent a little more than I was used to, and she sacrificed a little more than she was used to.

We were convinced our compromise of financial personalities was for the greater good of marital harmony.  However, over the years our natural tendencies were overridden by circumstances – circumstances we created for ourselves, but had to work through nonetheless.

Just a couple years into our marriage my wife quit working as we decided she would stay home with our children. It was a decision we made together, and reflected both of our desire for her to be home until the kids were school age. Neither of us downshifted our spending appropriately for living on one income, and soon we found ourselves in debt. Our growing debt had an interesting effect on our relationship. My wife became a saver, and I sobered up (financially) after a couple years of spending more freely than I was comfortable with.

These days we are both enjoying a more frugal lifestyle. Just the other day my wife went grocery shopping and picked up $273 worth of groceries and cleaning supplies for $186. For hardcore couponers out there that might not sound like a huge savings. But for us it is huge! We both resisted using coupons for years, dabbling with services like The Grocery Game and other coupon websites only half-heartedly.

The reason we weren’t gung ho was because we weren’t both enthusiastic about couponing. I would clip, she would forget. She’d clip and give to me for my after-work run by the store, and I’d forget to use them at the checkout. But when we both got on the same page we started realizing some serious savings.

This same synergy developed through shopping with coupons has carried over into other areas of our financial life. We both decided we were tired of being in debt and have been paying it off like crazy the last several months. We are now equally passionate about building our savings, our kids’ college savings plan and our own retirement.

How much do you and your significant other differ on finances? Has this changed since you first met?

I first heard the expression “man up” from my high school football coach. When we got tired, and started complaining about the heat, or hurting, or needing a break, he simply replied, “You better man up!” As a teenage boy I got the message, and played through exhaustion and injuries, even the one that ultimately derailed my plans to attempt to play football at the next level.

Today I’m a 31 year-old husband and father of two. Fourteen years removed from those experiences on the football practice field, I still find reasons to tell myself to “man up.” I see lots of examples of dads not acting like men when it comes to providing for their children, financially and emotionally.

For those who need an example of what it means to “man up” and take care of your family, I’ll share the following trailer from one of my favorite movies, Cinderella Man. Jim Braddock knew a thing or two about taking care of his family – playing through pain, swallowing his pride, sacrificing everything for this family, and fighting for what he believed in. We don’t have enough modern day Jim Braddocks walking around, but fortunately, we have great films like this to remind us what they used to look like.

Cinderella Man Trailer

I have a lot of respect for men who provide financial support for their children even when things don’t work out between them and their spouse. I have zero respect for fathers who don’t. To me, there is no higher calling than being a parent, and that means that after you have children you put their needs above your own. You sacrifice the spoils of single life and “man up” to take care of your family.

Unfortunately, I see plenty of examples of males (they aren’t men), who put their needs ahead of those of their family. They might be there for their family physically, but emotionally they are bankrupt. These are the types of guys so busy boosting their egos in the corporate world that they forget to boost their kid’s confidence by showering them with attention at home.

I’m not talking about the guy who works 60 hours a week because he has to, or the guy deployed around the world to serve his country, I’m talking about the guy that works long hours because he wants to. You know the type – he finds reasons to work late and volunteer for travel to avoid the “noise” at home. To him I say, it’s time to “man up.”

Finally, there is the guy who still lives the single life, partying with friends and buying all kinds of big-boy toys for himself while the basic needs of his family are not met.  I’ve seen guys like this drooling over cars, or boats, or computers, or paintball supplies while there kids are standing in the background with holes in their shoes and clothes that don’t fit. I just can’t understand that thinking, because I would give everything for my wife and kids. That is the essence of being a real man. That is what it means to be a “frugal dad.”

On this, the longest day of the year, there is no excuse not to reconnect with your kids. Go enjoy a few quiet moments with them outside, teaching them to appreciate the nature that surrounds us. Take the kids for a walk around the block, or at the park.  Give them a call if you are separated. Whatever your circumstances, “man up” and be a great dad!

For the better part of my early twenties I acted like a financial ostrich.  When I began to worry about our financial future, such as how we were going to live on one income, or pay off my school debt, or pay for my kids’ college education, I simply buried my head in the sand.  After all, it was easier to do that than face the mess I had created.

Photo courtesy of lorentey

But those months spent with my head in the sand now represent time wasted for putting things back on track.  The opportunities lost for compounding growth will never be recouped, no matter how much I save in my thirties and beyond.  Sure, I can make up some ground, but that $10,000 I could have easily saved in that decade would have grown to hundreds of thousands by retirement. So what’s the lesson here?

If you are young, do not ignore your financial future

I know when you are young the thought of retirement is a distant future, but there are many things that happen between graduation and retirement that you need to plan for.  Things like buying a home, a car, having children, paying for braces, paying for your children’s education, etc, all compete for your limited supply of money.  Somewhere in all that you will need to continue to save for your own retirement, so why not get a head start before all these competing priorities enter the picture.

If you have your head buried in the sand, look up before you get run over

Remember the old Road Runner cartoons when Wile E. Coyote stuck his head down the manhole cover of a busy street, just as the sound of a truck began to rumble towards him.  You knew what was coming next – WHAM! The truck hits Wile E. Coyote and sends him flying.

This is kind of like what happens to us ostriches.  We keep our heads stuck in the sand because we don’t have to hear, and see, all the noise above the surface:  The car payment we can barely make; the mortgage payment we are late on; the kids’ college fund with barely enough to pay for textbooks, much less tuition; the credit card debt that continues to climb thanks to a 28% interest rate.  If you don’t look up soon, that “truck” will smack you right in the rear and send you flying.

It’s never too late to get started

Some of you might be reading this and thinking, yeah, great advice.  Wish I had read it thirty years ago!  It’s OK.  I know it sounds cliche, but it really is never too late to get started. If you are 50 years old, have virtually nothing saved and a pile of debt, start working down that debt!  And when it’s gone, start adding more to your retirement plan at work, open a Roth IRA, and begin to take back your financial future.  It’s never too late to look up.