The Major Components of a Healthy Financial Plan: Emergency Funding

Financial emergencies happen all the time.  It seems that no matter how careful you are or how well you take care of things, Murphy’s law always finds you.  Unfortunately, even though we know financial emergencies will occur, many Americans are not adequately prepared to deal with them.   A survey in September 2009 found that 61% of Americans are living paycheck to paycheck and that includes 30% of those who have a salary over $100,000.  It can be a scary place without having any kind of emergency funding.  Without emergency funds, turning to or going back into debt is the only solution many have and it can lead to a sense of hopelessness that you will never be able to stop the cycle and get ahead financially. 

The question asked when talking about emergency funding is, “How much do I need?”  It is a very good question and we recommend doing your emergency funding in two stages.  The first is the $1,000 baby emergency fund.  This is what we recommend having before you start doing your debt snowball for debt reduction.  Having $1,000 in the bank will give you some breathing room from life in case of emergency; however it is not enough to cover a job loss, major car repair, or medical emergency.  Stage two then is for you to set aside 3-6 months of expenses in your fully funded emergency fund, after paying off all your debts except the mortgage.  Having the fully funded emergency fund will give you peace of mind and let you focus on your long-term financial goals.

Usually then the question I get is, “How do I start to save for my emergency fund if I have trouble paying my bills right now?”  There are a few quick solutions that many people try.  Some try having a garage sale, putting stuff on eBay, or post listing on Craigslist.  Others sometimes get the dreaded temporary part-time job to earn some extra cash.  Others can simply save just by making cuts from the budget including; stop eating out, take no vacations for a year, or cut down the clothing budget to only necessities.

Having an emergency fund will change your life.  It will allow you peace of mind at night knowing that you have space from a financial disaster if a financial emergency takes place.  In addition, when these emergencies do occur they will not necessarily be an emergency but rather an inconvenience.  For some of you having $1,000 in the bank is something that you have never had happen, for others having enough money to buy a new air conditioner when yours goes out in the middle of the summer and not having to put it on a credit card is something you dream about.  To sit down with us in person to map out a plan to cover your emergencies, in addition to long-term planning please contact us today!

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