Financial Planning for Disasters and Emergencies

Friday, March 12th, 2010 by George

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:

You are laid off.

A sudden illness or accident puts you out of work for months.

You have a sudden unexpected car repair of several thousand dollars—transmission, air conditioning, etc.

Your identity is stolen.

A natural disaster makes your home unlivable.

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:

Do you have more than a basic cable package? Do you have premium channels? You could cut back here and have $10 to $30.

Do you have DSL internet service? Most providers offer various levels of speeds. Could you drop down to a lower speed (most can’t tell the difference in the lowest DSL speed and the highest)? Savings could be as much as $25.

Cell phone: See if you can go to a less expensive plan. That could save as much as $50.

Eat out one time a week less. That will save, for a couple, $20 to $60 a week.

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.

Tags: Emergency Fund, Planning, Saving

This entry was posted on Friday, March 12th, 2010 at 12:37 pm by George and is filed under Budgeting, Money Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.