How to Prepare for the Future
For some reason in life, when it rains, it poor’s. Most of us think that we have prepared for these situations and we’ve got it covered, right? I mean it’s not going to happen to me, today. WRONG! We all want to believe this, and manage to talk ourselves INTO believing this theory at some point during our career.
Financial planning is all about planning for every scenario. What if this, what if that, what if: planning for the best case scenario, as well as the worst case scenario’s. Too many of us hear the words “financial planning,” and quickly run because we do not believe we have enough money for this to be necessary. WRONG! Financial planning is for everyone, whether you have -$5,000 or $1,000,000 in your account.
If this -$5,000 is you; don’t be afraid. Reports are showing average american households holding about $5,000-$8,000 worth of debt. You’re not alone. And there’s a way to get out! (Numbers tend to vary depending on where you go to look for information). To learn more about the statistical average, look here: Is Your Credit Card Debt Average?. This link, along with many others provide great information about today’s debt.
If you’re interested in learning more about Financial Planning I highly suggest, Dave Ramsey’s Complete Guide to Money: The Handbook of Financial Peace University. This book is (in my opinion), the greatest resource to help anyone understand financial planning.
If you’re somewhat new to the personal financial scene, let me start with the basics and one of the most important things to all income holders: Emergency Fund.
What is an Emergency Fund?
An emergency fund is money set-aside in a location that does not get touched unless an emergency occurs. This emergency situation can be very different to all sorts of families, or people. However, an emergency fund is always something that is not expected that occurs, like a car crash, or a job loss: life inconvenience type situation’s.
An emergency fund is very different from a savings account.
NOTE: A savings account is something that we save money into, for planned future expenses. I expect school to begin in the fall and in the spring and because of this, I know tuition costs will hit me in August and again in January. I also know at the beginning of the school year I will have to expense for books, and any other utensils, notebooks or other items that I might need to begin the semester (for some people a new wardrobe might go here!). A savings account is where I would put money to save for items that I am expecting to come and I would allow the money to sit over a period of time until I have enough money saved for this occasion (another example would be vacation). So, I put money into a savings account in order to fund future known expenses.
My daily checking account is used for items that occur on a regular basis. Groceries, rent, or mortgage, auto loans, and even dog food would fit into this category. This is why it is so important to create an emergency fund. With my checking and my savings accounts I have money for daily living and enjoyment. However, the what if scenario has not been planned for. Unfortunately, when the what if scenarios arrive, it seems to hit all at once. Most recently, my husband and I had to replace the tires and windshield on our jeep, and make some major upgrades on our truck. (Why must it happen all at once?!) Oh, did I forget to mention that it was that time of year for both vehicle inspections and registrations to be renewed? (How is it this time of year already?!) Luckily, because we knew about the expenses for the registration and inspections, we had money set aside in a savings account. However, we had no way of knowing that the tires already needed to be replaced, nor could we have expected the truck items needing to be taken care of.
Can you imagine the stress we had? All these expenses hitting us, plus trying to finish school, plus dealing with day to day issues- it seemed crazy! Thanks to my education and learning, we had built our emergency fund last semester and set it aside (thank goodness we were prepared!).
How much should we have in an Emergency Savings Fund?
Accumulating an emergency fund savings of 3 to 6 months worth of expenses is the general rule of thumb. If I lost my job today, how much money would I need to cover my expenses until I get paid from a new job? With no income, and monthly bills (groceries, gas, loans, etc.) I have hit the bottom of my checking account; so now I must jump into my Emergency Savings Fund.
Where do these numbers come from?
If I lose my job today, I begin looking for work; however, before I land a job of equal income it will be 2 months (minimum- just being realistic!). Once I start my job, I typically will not receive a paycheck for 3 weeks. Again, this is a general rule of thumb. Also, These are just suggestions from financial analysts who have done lots of research on what we need to set aside for these types of situations.
Where to keep my Emergency Fund?
Simply put: I keep my Emergency Fund in liquid form. Liquid money is a Certificate Deposit (CD) or money put into a checking account. Liquid just means that it is easily accessible. Many times you will hear people talk about liquidity (how liquid are your assets?). This is all they’re referring to. That amount of cash, in my hands, I could have today.
You might be wondering, why not place the money into something that has a higher interest rate? This is an easy misconception and not alone in thinking this! However, you must remember the purpose of the Emergency Fund: to save in the case of an emergency. This bundle of money is not meant for retiring or day to day living expenses. We want to make certain this fund cannot go down (under the amount of what my monthly expenses would be, if I lost my job today).
As I get closer to my graduation date, I have realized the cycle of debt, specifically student loans! I have observed society, myself included, struggles with having money and how to handle it properly. Coming out of college with credit cards, student loans and having yearly, monthly and day to day expenses, the emergencies I have experienced have helped me to understand the concept and importance of having an emergency fund. Being a student and owning a car, I understand emergencies occur and have learned the importance of an emergency fund, even if I don’t have a huge savings account.
Living in Houston, Texas, I put a lot of miles on my vehicle daily, which can lead to car issues occurring more frequently. If I did not have an emergency fund, I would not have a car to get to work to make money, a necessity to pay bills. So, over time, I have
Remember, YOU’RE NOT ALONE!! Whether you’re in debt, have too much money you don’t know what to do with, or anywhere in between, hang in there! Put together a plan and hold yourself to it! Don’t wait until you are in need of an emergency fund to start saving, START TODAY!
I’ve provided some additional resources which I have used in the past couple of years when getting my emergency fund together. Dave Ramsey is a great resource for all things financial, and gives us step by step processes that anyone can use. I highly recommend Dave Ramsey’s Book, and Total Money Makeover Workbook. These are great books to get started with in learning how to become better set financially.
Readers, what do you do to prepare for an emergency, financially?