Decide and Make a Plan to Save It
Life’s going along great, you’re careful to live within your budget, pay bills on-time, put up some retirement savings. You’re doing your best to ensure everything is right when it comes to your personal finances.
And then it happens. The unexpected costs – unexpected medical, break downs, car repairs, start to foul up your safeguarded plan. For some folks, they may be able to absorb such financial shocks from their regular paychecks, others it simply overwhelms them.
Another question to consider in our unstable economy is what if you suddenly lost your job? For most people, it would take a minimum of three to six months to regain employment.
Every personal financial plan need to include an emergency fund to cope with the unexpected turns that life will bring. It’s kind of like keeping medicine in your cabinet, for an unexpected headache, but in this case – it’s a financial headache.
How Much Do You Need?
Traditionally, many financial planners suggested having three to six months of reserve funds. With the recent staggering economy and recession, studies are showing much more time is needed to regain employment. Now the suggestion is to set up nine to twelve months in reserve to lessen the likelihood your long term financial goals won’t be interrupted. Granted, it is a bit more of a prudent approach, but still doable.
Studies with Money Magazine in 2014 showed that 66 percent of American households with less than $100,000 in annual income would not be able to produce $10,000 to cover unexpected costs. It further reported more than one third of households earning in excess of $100,000 had the same fear. Unfortunately, most people are truly unprepared when a crisis hits.
If the crisis must be met in a hurry, things can get expensive. For example if you had to raid your retirement account, you might incur unbelievable high tax penalties or investment losses.
So How To You Start Saving?
First, don’t panic. Decide how much you really need to get thru an unexpected crisis and start saving toward that goal. Simply tighten up a bit and start putting back a little at a time. Don’t stop paying into your retirement, paying down credit cards and other accounts, but do start saving something.
For most, it will be less than you expect. You won’t need to put away a half years salary. Keep your focus on the true costs , not on income. When people get in a tight, they generally know how to curve luxury items, entertainment and other “wants” as some may categorize. All you need it the bare-bone calculation of items you absolutely have to pay. Things such as rent/mortgage, car payment, loans, credit cards, child care, utilities, etc. You might also need to consider medical insurance or expenses, if you suddenly lose coverage from your job.
How to Keep It
Many believe the myths that an emergency fund must be kept in pure cash. For all practical reasons you should keep the assets liquid, meaning you could get your hands on them in a hurry if needed. Things like short term bonds, certificates of deposits and money market funds can still generate better interest than a traditional savings account, and still give you quick access to your money when you need it. You’ll realize that earning that income is important, because if you’re lucky that fund could sit for years untouched. Hopefully inflation will be low, so your money can keep pace with consumer prices, so your money will still have the same buying power if/when you need to tap in for the unexpected.
With a bit of careful planning and foresight, the emergency fund you set up can not only be a stress reliever, but another income source as well. But most importantly, it can help you keep those unexpected crisis from becoming true emergencies.