2006 was a good for year for Stan Reddy.
He and his wife Christine had just bought a new home… a baby was on the way… and his salary as a financial adviser had just broken $200,000.
“It felt like we were just starting this amazing chapter in our lives,” says Stan. “There were a lot of cocktail parties and ski vacations. We were very happy at the time. But we had no idea what was coming.”
“What was coming,” of course, was the worst financial crisis since the Great Depression. One that would tear through the country like a hurricane, slashing jobs and foreclosing homes.
Like millions of hard-working Americans, Stan lost his job in the early days of the crisis… and it quickly devastated the couple’s financial situation.
“When Stan lost his job, we went into a financial OTHER,” says Christine. “We hadn’t been great at saving back in those days. We were making a lot of money but we were spending a lot of money too.”
Despite Stan’s $200,000 salary, the Reddys’ were spending almost 100% of their monthly income, leaving nothing for savings or investing.
Somehow, they were living paycheck to paycheck on a six-figure salary.
Some of that was the “cocktail parties and ski vacations,” of course. But a surprisingly large percentage of their income was dedicated to repaying loans for their expensive three-story home and top-of-the-line cars.
So when Stan lost his job, they were in big trouble. You can always cut down on cocktail parties and vacations. But you have to keep paying your mortgage no matter what.
“With no income, we couldn’t afford to make payments on our home,” says Christine. “It was only a couple of months before we were forced to sell our home and move into my mom’s basement for a while.
“People asked me how that was possible. But the payments on the home alone were almost $5,000 a month. It’s embarrassing. But it’s more common than you think. We know of lots of folks with six-figure salaries who were in the same boat as us.”
Losing your home is an awful experience. And I wouldn’t wish it on anyone. But how could all these folks with six-figure salaries have protected their finances?
To start, the Reddys should have had an emergency fund in place.
An emergency fund is simply a stash of money that’s easily accessible and available to cover necessary expenses if you lose your income.
Your emergency fund should be equal to eight–12 months of your income.
We talk about emergency funds in terms of income rather than hard numbers because everyone’s expenses are going to be different.
For example, my emergency fund is enough to cover my expenses for 12 months. But it wouldn’t last anywhere near as long if I had to pay the Reddys’ monthly expenses.
Which brings me to Point No. 2.
Even if you’re making $200,000 a year, you shouldn’t be buying a home with $5,000 monthly payments — especially if you’re a single-income household (more on that in a moment).
I fully support chasing your dreams and indulging in luxury when you have the money to do so responsibly. But taking on a commitment to pay $5,000 a month for 30 years is an enormous risk.
Stan was basically gambling that he would never be out of work for 30 years. But, as we learned during the 2008 crisis, no job is 100% safe. No matter how “secure” you think your job is.
Even with a $200,000 salary and a well-stocked emergency fund, $5,000 a month is a tall order during a financial crisis.
You might have more than enough money to get you through a year without work… but when you find a new job, you may not be pulling down the same caliber of salary.
Imagine trying to make $5,000 monthly payments when you’re only earning $75,000 a year.
Which brings me to the final thing you can do to protect yourself against a financial crisis.
$200,000 is a nice income to have for a couple. But that $200,000 came from a single source — Stan’s job.
This meant that when Stan lost his job, the Reddys lost 100% of their income.
This is why dual-income households tend to be more financially stable. Because even if you lose your primary income, you still have their secondary income to fall back on.
For this reason, a home with two $75,000 salaries is more stable than a home with one $200,000 salary — despite earning $50,000 less.
If you can’t or don’t want to have two earners in the household, you can still diversify your profit centers.
You can take on side gigs to make some extra money. Or reduce your hours at work to start your own consulting business.
You might be earning a little less overall, but your finances will be more secure. And many folks have actually found that they can earn more money by diversifying their profit centers.
As James Altucher, the author of TheChoose Yourself Guide to Wealth, points out, “A person with a 9-to-5 job has one source of income. Only one. But the average multimillionaire has seven sources of income, according to the IRS.”
And, as James knows better than anyone, creating a side income doesn’t mean you have to take on a second job. He’s found a way to pull $3,000 from the stock market every month. And all it takes is a few minutes a week.
To be honest, stock market trading is a little outside my wheelhouse. But if you want to know more, James will tell you all about it if you click here. But do it soon. This information goes offline Sunday at midnight.
As always, we welcome feedback from our readers. If you agree, disagree or have any financial horror stories of your own, you can email me right here.
All the best,
Editor, Money & Crisis