Did you ever go to the pharmacy to pick up a prescription and find out that it wasn’t covered by your health insurance plan? Your premium is deducted every two weeks yet this seems to happen with ever more frequency. If you should happen to visit a medical specialist be prepared for a round or two of testing and not have any idea of the cost until you get the bill a month later and then pass out when you see the charges. There always seems to be some unexpected expense rearing their ugly head no matter how carefully we plan.
You’re being prudent when it comes to finances. Reduce debt, contribute to a retirement plan and keep expenses down. Yet many forget or don’t consider the need for a financial emergency plan. What if you become part of the downsizing strategy at your company. You may be one of the lucky ones who receive some sort of package but many will not and either way you will need to pay for things yourself. Beside the stress, you will see your funds diminish and it will take some time to re-build your finances. An emergency plan makes sense. But how much should you put aside?
Generally speaking “experts” recommend having three to six months of cash put aside to cover your expenses. The amount will be different for everyone but this is a good place to start. If you have some expensive hobbies or take regular vacations this would be a good place to start your pruning. However, if you plan well enough and have a deep reserve you may be able to cut back without completely eliminating all your extracurricular activities. Keep in mind that higher level positions that are higher paying will take longer to find and the hiring process itself will be more involved.
Budgeting will be key and the first expenses to consider are the recurring ones. Mortgage or rent will be at the top of the list. It will also be the largest amount followed by auto loan payments if you have them, phone, internet and utilities. You will not be able to eliminate most of these expenses but if you have internet and cable bundled you may try cord cutting for a while. There is a lot of entertainment available over the internet.
We know we need an emergency fund and how much should be going into it. Where are we going to keep all that cash? And… the cookie jar is not the correct answer, although you will need quick access to the funds if the time comes. You should be able to invest the funds at a rate that will equal or nudge ahead of the inflation rate and not incur a withdrawal fee or penalty.
Due to the fact that this is an emergency fund you want a low risk financial vehicle to invest in. This means the stock market should not be a consideration. Unfortunately, emergencies situations are more frequent during economic downturns and largely consist of job losses. With the economic decline will come a stock market decline, the exact time when you need the funds the most. Consider money market mutual funds or CD’s (certificate of deposit) for your emergency funds. They are both liquid and have a rate of return that will stay ahead of the cost of living without the volatility of the stock market.
Finally, review your credit report and keep that score high. You might establish a line of credit, especially if you have enough equity built up in your home. As a last resort you could use a credit card for daily expenses until you’re re-employed but this will come with a very high interest rate if you cannot pay it off every month. Start contributing to the emergency fund now and before you know it you’ll have the peace of mind you deserve and the resources to combat the unexpected.