Your financial world may be good right now, but that doesn’t mean it always will be. You should take stock while things are smooth to make sure you don’t hit a rocky stretch later. This is particularly critical in today’s economic unruliness. Your financial world can be turned upside down in 24 hours.
Disasters That Lead to Financial Emergencies
There are many disasters that lead to financial emergencies. Some are natural, such as the 500-year floods in Georgia recently that left thousands homeless, and without any funds to rebuild. Others, which we are more concerned with, stem from economic situations. You may have an accident or become ill, and miss work for an extended period. Worse, you may get laid off. With 15 million unemployed now, finding another job is more than difficult.
Here are the major disasters that you could face:
Being Financially Prepared for Emergencies and Disasters
The first thing you must do to prepare for emergencies and disasters is to develop an emergency fund. Financial Planners generally agree six months net income is the absolute minimum. That gives you six months to find another job or recover from an illness or accident. That is cutting it close, however. It is safer to have eight months income in your emergency fund.
Where can you start? Look at your discretionary expenditures—those things you do for fun, etc. This is where you can probably find a few dollars to start your savings program. For example:
This gives you at least $100 a month to save. That’s a good start on a savings program. Interest bearing checking and passbook savings accounts are not where you want these funds. The interest is miniscule. But you need this fund to be immediately available. Your best bet is a money market fund, hopefully one that provides tax free earnings.
Now that gets you started on your emergency fund. But you also need to develop a catastrophic fund. Your emergency fund will be used up in eight months. If you—forbid—suffer that long term illness or accident, you may go through that. And whatever happens you do not want to tap into your 401k or any retirement funds. Those are for later years only.
CDs are fine for your catastrophic fund because you can probably arrange for them to come due at various terms. However, these days CD rates are not very attractive. A good mutual fund or again a money market fund may suit your needs better.