Here’s a dirty secret that many preppers don’t want to admit: They are better equipped to survive physically than financially. By survive financially I mean being able to pay bills, buy food, and put a roof over your family’s head in times of economic crisis.
An economic crisis can be personal: losing your job or not being able to work. It can also be national or regional like the Great Meltdown of 2007. It’s also something you should prepare for because most of us will face one sooner or later.
Financial survival means one thing and one thing only: protecting your money so it will be there when you need it. So that’s what we will focus on here: protecting your money so it will be there when your family actually needs it.
Diversification, the Secret to Preserving Wealth
If the last few years have taught us anything, it is that no investment or asset is completely safe. Any asset, including gold, can lose money or simply sit there for long periods of time and not make money. That means you need to diversify.
Diversification simply means not putting all your eggs in one basket. Having a small amount of gold as a hedge against inflation or disaster is fine. Putting all of your money in gold is a recipe for disaster, as the gold price chart above should show you.
The same goes for any other investment you can think of: stocks, real estate, bonds, etc. All of them lose money or stagnate occasionally. You need to get a mix of assets.
A good, simple diversification strategy is to have one third of your investment in stocks, one third in real estate or other physical assets, and one third in cash. By cash I mean cash in a savings account, CD, or mutual fund that is insured and earns interest. Remember, you can always pull your money out quickly if you think you’ll need it.
Watch Out for Inflation
The most destructive force when it comes to personal income is inflation. More people lose money to it than anything else. This occurs because they forget a very basic law of economics: bad money drives out the good. Over time all currencies, including the US dollar, lose value.
Those who do not believe need to take a look at the official inflation calculator maintained by the US Bureau of Labor Statistics. According to this calculator, a 1980 dollar is worth $2.83 in 2013 dollars. In other words, the dollar has lost more than half of its value or buying power since 1980.
The way to protect yourself from inflation is to stay away from cash. Rich people invest in the stock market because they know stocks rise faster than inflation. The same goes for real estate.
Don’t keep large sums of cash around, and keep most of your money in anything besides cash. If you want to keep something in your home, don’t keep paper cash; instead, store up hard goods or food that you can trade or barter.
If you think a collapse is imminent, store up something like ammunition, wine, cigarettes, whiskey, or paperback books. You can trade those things for food and other items that you can really use. They’ll be less likely to be confiscated by authorities or stolen by thieves than gold or cash.
If you don’t think a collapse is coming, put your funds into some sort of real estate that you can rent. You can write it off on your taxes, and you can get cash coming in from rent.
Pay Off Debts
Debt, as we all know, is the destroyer of wealth, yet most of us are deeply in debt. You cannot do anything about the federal deficit, but you can do something about your personal or family debts.
Pay off as much of your debt as is practically possible without exhausting your savings. Try paying off high-interest debts like car loans and credit cards first. Then pay off your mortgages and student loans. Student loans in particular should be paid off because they’re the only kind of debt you cannot write off in bankruptcy.
There are many great debt reduction strategies out there; do some research on them and find the one that works for you. Something to consider if your debts greatly exceed your ability to pay them off is bankruptcy. It isn’t a fun process, but it can discharge large amounts of debt.
Debt repayment should be a priority even if you think you are in good financial shape. The truth is that there is no financial advantage to any kind of debt, including mortgage debt. The best formula for financial survival for the average person is to have your home and your car paid off. If you have any sort of debts, sit down and devise a plan for paying them off.
Have Enough Insurance
After debt, the biggest threat to your financial survival is a lack of insurance. Far too many Americans either have no insurance or not enough insurance. Worse, many families are paying for insurance that will do them little or no good when they actually need it.
Basically, there are four insurance policies that everybody needs but may not have. They are life insurance, health insurance, disability insurance, and homeowner’s or rental insurance.
In a nutshell, life insurance provides money to support your family if you die; health insurance pays for medical care if you get sick or injured; disability insurance provides income if you cannot work; and homeowners insurance pays to replace your home’s furnishings if they get damaged or destroyed. The scary thing is that vast numbers of people don’t have these policies.
If you have kids, you need disability and life insurance. A working person with two or more kids at home will need around $1 million worth of life insurance. That will allow your spouse to pay off the mortgage and support the kids if you get killed in a car accident. Generally, the average person can get a better deal on life insurance by buying it themselves. Whole life, which can be used as an investment, is better than term life insurance for most people. Something to remember is that life insurance is tax deferred, so you don’t have to declare money you spend on it on your federal income tax.
Disability insurance pays the bills if you cannot work. Most adults will find themselves unable to work because of injury or sickness at some point in their careers. Disability insurance pays you cash if you cannot work. If you don’t like disability insurance, ask yourself this: Do you want to end up relying on food stamps to feed your family? If you have a serious health condition like cancer, there are disability policies that can help pay for things like the mortgage and even the cleaning lady.
If you’ve been to any sort of doctor in the last few years, you know only millionaires can afford to pay for health care out of pocket these days. If you want to avoid going into bankruptcy if you get sick, you’ll need health insurance. (And actually, Obamacare will soon be forcing you to buy health insurance whether you want to or not.)
Homeowner’s or renter’s insurance pays to replace the contents of your residence in case of emergencies like fires or theft. You need homeowner’s or renter’s insurance for one simple reason: to pay to replace your stuff if it gets destroyed. If you don’t think you need homeowner’s insurance, ask yourself this: Can you afford to replace everything in your home? If the answer is no, you need homeowner’s insurance.
These four basic strategies can help you survive financially in today’s America. If you don’t diversify, don’t have adequate insurance, don’t understand inflation, and have a lot of debt, you will not survive financially. Remember, financial survival is the key to physical survival.