You’re fired! Now what? It’s the nightmare scenario, and you can prepare for it by conducting a financial drill. Take a moment and pretend you have no income. Ask how you would pay pay for rent and food, and what lifestyle changes you could make on two week’s notice. To guide your planning, the New York Times has a few unorthodox and downright scary suggestions that are worth considering in a worst case scenario.

Spending: Slashing spending should always be your first move, even in good times. Restaurants, movies, cable, vacations, all of these can go. The Times also suggests taking a close look at your car. Is it nice? Good, then ride it ’till it’s dead. “Mr. McKinley, who drives a 2003 Honda Pilot with 80,000 miles on it, suggests flares, blankets and a backup cellphone for those who worry about car trouble.”

Borrow: Yes, borrow. Since your credit will dry up as your financial situation worsens, tap your credit lines while they’re still available. This means charging large expenses (read: critical repairs, not new plasmas) to your credit card, freeing up your savings for other vital expenses. If you don’t expect to make money anytime soon, borrow from your family.

This is, of course, extremely dicey advice that should be reserved for emergencies. Even then, don’t try it unless you have savings in the bank and think you’ll soon be working again so you can repay your newfound debt.

Rejigger Your Assets: Guard against a financial double whammy by switching your retirement funds to a more conservative allocation. Consider how much you can pull from your 401(k) and Roth IRA without incurring penalties.

Here’s another bit of fancy footwork [Kevin McKinley would] suggest considering in your drill, keeping in mind once again that this is an only-if-necessary plan. If you have a working spouse, you could borrow twice as much money from the spouse’s 401(k) as you think you’ll need for living expenses. Pay it back slowly, as you would with the credit card. Then, if at some point your spouse is out of work, too, at least you have the money you need in addition to money left over to pay taxes and penalties you may be assessed if your spouse’s employer demands immediate loan repayment and you can’t comply. Once your spouse lost the job, you probably wouldn’t be able to borrow against the 401(k) anymore.

[…]

For those fortunate enough to have some savings, Mr. McKinley notes that a Roth I.R.A. is a good account to tap, because you can generally withdraw your initial contributions (though not your earnings) before retirement without taxes and penalties. He suggests breaking into college savings accounts, too, if necessary, even if there are taxes and penalties. After all, borrowing to send a child to school is reasonably easy for people with decent credit.

Remember, this isn’t day-to-day financial planning, this is planning for emergencies. Working through a financial fire drill and seeing how much the little things adds up might actually convince you to spend less now, which has the bonus benefit of beefing up your savings. More than anything, planning out the worst case scenario gives you a better sense of your financial standing, and should give you the confidence to react to disaster with poise, not panic.

Preparing Your Budget for Disaster [The New York Times]

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