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
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.
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.
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.