Weathering Financial Storms

If I asked you to name someone you know who has experienced an unexpected financial “crisis” in the past 5 years, you could probably think of them within a few seconds. Most of you have been there yourself. The transmission in the car dies and needs to be replaced. A son or daughter gets injured and you are faced with a large medical bill. Work slows down and your income decreases. Perhaps you get injured and you can no longer perform your job at work and must look for new employment. Whatever the situation may have been they don’t have to become a “crisis”. The reason these situations become a crisis is because people aren’t prepared for them. I read a statistic that 90% of people will face a major financial crisis every 10 years!

Ignorance would handle this by imitating an ostrich and burying its head in the sand, acting like things will be fine as long as I’m not looking. The better approach would be to take the advice found in Proverbs that says to store up in the summer to prepare for the winter. Storms will come in life. Financial, relational, emotional and the rest. The key to these storms not becoming a crisis is to prepare in advance for them. You won’t typically know when a storm is coming but you can make sure that you have a dry place to wait it out when it comes.

An Emergency Fund is a storm shelter for your financial future. A solid emergency fund is 3-6 months worth of your monthly expenses. This means that if your monthly expense budget including home mortgage and rest is $3000, you would need to have $9,000 to $18,000 set aside in a separate savings account. Determining where you fall in the 3-6 months takes looking at your income source(s). If you are 100% commission based or have large swings in income you should lean towards the 6 months. If you have a good salary in a long-standing company, you could lean towards 3 months. However, for most people the closer to 6 months the better. This money should be placed out-of-reach of your regular expenses, but accessible enough to get at in real emergency’s. A good place for these funds would be a money market account with check writing ability. This would earn you a little interest on your money without it being tied up in a stock, CD, or other type of savings that may have a penalty for touching it. A strong emergency fund will cause what may have been a major financial “crisis” to be more of an inconvenience.

There are a few other items to address to become fully protected from storms like Disability Insurance, Term Life Insurance, and a Will among others. I will address each of these in an upcoming post. For now, get started on your emergency fund.