2 Tips to Beat Your Next Financial Crisis

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For many people, the financial impacts of the past two years were completely unexpected. If you're fortunate enough to get some advance warning of unfortunate news, however, then you may be able to take some steps to reduce the pain of a job loss or other financial calamity.

Even high-income people lose their jobs
A newspaper's sports section isn't usually a big source of ideas about personal finance, but a recent sports-related story has an important lesson that millions of workers can learn from. In both the National Football League and the National Basketball Association, threats of lockouts and work stoppages are raising the specter of professional athletes facing a long period of time in which they may not be able to earn paychecks. According to the articles, players' associations have been told that there's a 99% chance that next year's NBA season may be disrupted by labor problems, while NFL players got a letter saying that a delay to the start of next year's season could cost players three or more games of the season -- amounting to almost 20% of their annual pay for a 16-game season.

In response, players are being urged to set aside money now to help get them through what amounts to a short period of unemployment. And while you might not feel that worrying about multi-millionaire stars is worth thinking about, players who earn closer to the league minimums are in situations similar to what you might face if something happens to your job.

How to get ready
In the case of the NFL, players have known for years that potential problems were looming. You may not have that much notice, but with economic conditions the way they are, the sad fact is that you need to prepare for financial stresses no matter how secure you may feel about your job.

There are two smart ways to start preparing. The first is obvious: Set aside some spare money to create or boost your emergency fund. Rules of thumb recommend saving three months' worth of salary, but with unemployment still near double-digit levels, it's prudent to set aside more than that to help you in case it takes longer than you expect to get another job. Another benefit of saving more is that it gets you used to living on less -- a valuable skill to have if the worst does happen and you find yourself living on a restricted budget.

Make your portfolio pay you
The other thing to consider is more subtle but potentially equally useful. If you can milk more income from your investments, then you'll be better able to weather periods of having less income from work. To get a sense of how to do that, I took a look at the investment strategy for Vanguard's managed payout funds, which are designed to generate monthly payments for investors who need regular income.

Vanguard combines stock and bond investments to generate income. For instance, the Distribution Focus Fund, which tries to create maximum income for shareholders, has about 25% of its money invested in the mutual-fund equivalent of Vanguard Total Stock Market (NYSE: VTI  ) . An additional 20% is divided among international stock funds like Vanguard European Stock (NYSE: VGK  ) , Vanguard Pacific Stock (NYSE: VPL  ) , and Vanguard Emerging Markets Stock (NYSE: VWO  ) . It also invests in a market-neutral stock fund and includes a 10% allocation to the Vanguard REIT Index (NYSE: VNQ  ) . On the bond side, the fund stretches for some extra yield from investment-grade corporates via Vanguard Intermediate Term Corporate Bond (Nasdaq: VCIT  ) , as well as owning the broader Vanguard Total Bond Market ETF (NYSE: BND  ) .

You can use a similar strategy on your own to generate income, supplementing general investments like these with specific income-producing assets like master limited partnerships and dividend-paying stocks. The key, though, is realizing that even investments intended for the long term can still help you out during tough times.

Be ready
If you see trouble on the horizon, it pays to be prepared. By knowing how you'll handle tough times before they strike, you'll be better able to anticipate troubles and weather financial storms more easily.

Learn more about how to take care of your own retirement by clicking here and reading the Fool's new special report, "The 7 Secrets to Salvage Your Retirement Today."

Fool contributor Dan Caplinger didn't have much of a salary negotiation for his third-grade football team. He owns shares of Vanguard's European, Emerging Market, and REIT Index ETFs. The Fool owns shares of Vanguard Emerging Markets Stock ETF. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy still marvels at Tom Gardner's 50-yard pass reception.

Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2010, at 5:24 AM, rjc1961 wrote:

    how about adding the vanguard energy, i did well in 2010 ,ticker: VDE , 2011 might be another good year for this ETF

  • Report this Comment On January 03, 2011, at 4:17 PM, 94hokie wrote:

    Great article. I sum it up as "be prepared for life not always being perfect and exactly what you planned". The bad part is I fear many will not heed the advice. We shouldn't be allowed to graduate high school without a "B" in a class that teaches such realities.

  • Report this Comment On May 16, 2011, at 11:01 PM, easyavenue wrote:

    94hokie, you are SO right! I might add: And learn to deal with such changes with peace, humility and dignity. Then move on. Bitching about it just grates on the rest of us.

    Another great, practical article, Dan. Should be mandatory reading for everyone.

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