Why You Need an Emergency Fund – STAT!

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An Emergency Fund Will Help You Stay Afloat

By: Kevin R. Worthley, CFP®

In more than a decade of financial planning for families, it’s rare to find a client who has an adequate emergency or contingency fund in their family finances.  The recommended amount of such savings varies between many experts and financial planners, but in general, several months’ worth of after-tax living expenses is probably a good idea.  I often counsel clients who are self-employed or whose income varies from month to month (examples; sales professionals or seasonal workers) to have a little more stashed away in case their “sales pipeline” or expected income hits a dry patch now and then.

While interest rates paid on savings, checking or money market accounts at your local bank are certainly nothing to get excited about today, having ready cash when your income isn’t enough to meet expenses (or when that unexpected emergency crops up) can be like a warm fuzzy blanket on a cold, rainy night.  Nothing has illustrated this basic financial planning tool more than our current dismal unemployment situation.

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In my own little section of the world, a major coffee and donut chain recently decided to close all its shops, abruptly, and with no warning whatsoever to its thousands of employees.  Workers showed up for their shifts, only to find the doors locked and windows boarded up.  There was no severance pay, no chance to plan for this, nothing, and in the middle of a severe general unemployment market.  Those who have no savings or fall-back income must now depend upon unemployment benefits to meet their living expenses.  For most, it was truly a rough set-back to both their holiday plans this year and possibly their financial futures.

Even if you have a steady, secure job, unexpected disasters can derail your finances just as easily.  From the unpleasant, but relatively minor, occurrences of the washing machine or car needing major repairs, to the more significant such as a disabling injury or health issue or a major home fire or other disaster, situations may require significant outlays for co-insurance, deductibles, meeting expenses while waiting for insurance reimbursements, meeting expenses not adequately covered covered by insurance policies or a string of minor incidents which aren’t normally troublesome, but can add up if the timing is unfortunate. Murphy’s Law often comes into play in personal finances, as you might imagine.

If you don’t yet have any kind emergency savings fund, here’s how to get started:

  1. First, review your monthly expenses and checkbook to estimate what your household requires each month.
  2. Next, consider multiple situations where your income could be interrupted, what fall-back income you might be able to count on in such situations and how much would need to be withdrawn in savings to meet the short-fall.
  3. From there, consider how long this adverse situation (unemployment, temporary disability, etc.) might reasonably last and therefore, how many months worth of living expenses you need to squirrel away.
  4. Finally, resolve to save, even a tiny bit from each paycheck, to build an accessible, principal-guaranteed account.  Interest earned is really not an important point here.  The goal is having readily-accessible cash that you can get to if needed.
  5. Lastly, be sure the account is also accessible by a trusted individual (family member, etc.), should you be incapacitated and cannot arrange to access the account yourself.

Having this literal “life-preserver” of cash can be very comforting in times of financial stress and need.  Every family should consider such an account as a core component of their “emergency kit.”

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Kevin Worthley is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. He enjoys fly fishing, other outdoor activities and is a dedicated yoga practitioner. Contact Kevin for help on virtually any financial advice need.

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