Elizabeth Warren and Amelia Warren Tyagi, authors of The Two-Income Trap, suggest that couples ask themselves these three questions in order to be better prepared in the event of a financial emergency.
1. Can your family survive without one income?
If both you and your spouse work, what would you do if one of those incomes went away? Could you survive for six months? If only one of you works, ask yourselves if the stay-at-home parent could enter the job market if something happened to the primary breadwinner. If the answer is no, you need to come up with a concrete disaster plan for if/when the unexpected happens: an illness or layoff, etc.
2. Can you downshift your fixed expenses?
If you are feeling squeezed financially when times are good, where will you cut back if a real financial crisis appears? You may have a problem with your fixed costs. Now is the time to take a hard look at the necessities, not the frills. Is there something that you are committed to on a month-by-month basis that you can pull back on? Can you manage a few more years without a new car? Can you sign up for the lower-cost HMO? Do you need premium cable TV, expensive classes or gym memberships? Should you move to a cheaper house with a smaller mortgage?
3. What is your emergency back-up plan?
Everybody checks the batteries on the smoke detector and everybody knows the way to get out of the house if there is a fire. You have to be able to do the same thing financially by having a plan. Now is the time to ask the painful "What if?" questions and prepare for the unthinkable. What if your husband loses his job? What if your health fails? Make a plan and consider what can be done now to make that plan feasible. Think about your basic expenses and put some money aside in case of an emergency.
View more advice from the authors.
More financial advice can be found in The Two-Income Trap
By Elizabeth Warren and Amelia Warren Tyagi