Are you finances in order to handle those financial emergencies
while you are making other plans?
According to a survey conducted by the National Foundation
for Credit Counseling, 64% of Americans don’t have enough cash
on hand to handle a $1,000 emergency.
I don’t want it to rain on anyone’s parade, but you never know when:
That car transmission will go out
That lay off from your job becomes a reality
You get sick and can not return to work for the foreseeable future
We all want to believe it will not happen to us. I use to believe this until
I had these above events happen to me at different times in my life.
It becomes extremely stressful financially when unforeseen circumstances
show up in life with nothing to fall back on.
Most of us have heard the old school of thought:
“Save your money for a rainy day.”
The old school way is to put money away when times are
good so when times are not so good you have money.
Somewhere over time, this concept has been replaced with the
new school of thought:
“Borrow the money for a rainy day.”
With the new school concept you can fund your problems
with a credit card or borrow the money from the bank.
The problem with the new school of thought is you are
increasing your odds of creating a financial hole that can
be hard to dig yourself out of.
Besides, if you loss you job what bank is going
to lend you the money?
Living just six months on a credit card can create
a payback plan for the next 15 years.
This new school model is living a life of financial instability.
Why put that much stress on yourself when you can
do something about it, NOW?
There is a much easier plan that has been around
for hundreds of years, but uncommon in today’s
world – funding an emergency fund.
Think Old School
Grandma stuffing money underneath the mattress
makes sense when planning for financial stability
by funding an emergency fund. Although you don’t
need to revert back to the mattress stuffing days,
you can put the money into a bank.
An emergency fund can be started at your local
bank by placing money into a liquid account – preferably
in a savings account paying you interest. The money needs
to be liquid so you can take it out immediately with
no penalties. It is not advisable to have an emergency
fund where the money is parked in a CD, the stock market,
or the bond market.
How Much to Save
Financial colleagues say your emergency fund
should be able to cover at least three to six months’ worth
of expenses in case you get sick or you lose your job.
This is practical when economic times are stable and
the job market is strong, however, in today’s economic
environment it is not so practical.
My advice is to have at minimum 7 months
of expenses saved. According to the Bureau of Labor
of Statistics, 40% of unemployed workers are taking
over 6 months to find a new job. Three months is barely
enough time and before you know it 6 months
will be at your door step. Put the odds in your favor
by having enough saved.
Getting Started
If you currently don’t have an emergency fund
then make it a priority to get one started. It may
seem out of reach to save 7 months’ worth of expenses
in the beginning. The best way is to take small steps.
Set a goal to save one month of expenses then two
then three and so on. If you take it in steps and make
it manageable you will have a better chance of
establishing a full fund.
What I found is, once I had an emergency fund
in place the unforeseen events decreased. It was when
I didn’t have one everything seemed to want
to work against me.
So, forget about the new school and go back
to the old school way of saving for a rainy day
like Grandma did.
Grandma will be proud of you.