After a few rough years of recession, good economic news appears to be on the horizon for Colorado Springs. Still that’s no reason to let down your financial guard.
Whatever the economic outlook, it’s always a good idea to have a personal emergency financial plan in place. You may never have to use it – but better to have one and not need it than the other way around.
A financial emergency plan helps eliminate or greatly reduce the panic associated with an unexpected change in your income, health or lifestyle – leaving you the time and energy to deal with the crisis itself, rather than financial concerns.
Building an adequate emergency fund takes some time, but surprisingly not as long as you might think. Here are some basic emergency financial planning strategies to help you financially prepare for the unexpected:
Assess your needs
First, get a handle on your expenses. Figure out how much money you and your family would need to meet existing financial obligations, such as food, housing, utilities, transportation and insurance.
Be sure to come up with an amount needed to see you through three to six months of bare-bones living expenses, which is the standard rule of thumb, should you find yourself temporarily out of work. Many people, particularly those with higher salaries, will need more, however, because it might take them longer to find new employment.
Build your cash reserves
A cornerstone of any emergency plan is a cash reserve. If your current financial obligations make saving money difficult, you might consider cutting back on discretionary spending – such as entertainment, dining out and clothing – to free up cash for your emergency fund.
Spending $40 on one dinner out each week might not feel like much, but when you realize that you’re spending more than $2,000 a year to do so, you’ll see how the numbers really do add up.
Skip this one little luxury and you’d be able to make a substantial contribution to your emergency fund. Even better, make this amount part of an automated transfer from checking to savings each month and watch your funds accumulate, almost painlessly.
Once you’ve begun to set aside money for your emergency fund, you need to determine the best place to keep it. A money market account at your bank is one good choice – an added benefit is that this very safe, FDIC-insured type of account typically offers a higher interest rate than a traditional savings account.
Arrange for credit
Not all of your emergency funds must be cash in the bank. Consider other options, such as a home equity or personal line of credit. This is a feasible option because you are charged interest on this money only if you use it.
Keep in mind that establishing a line of credit now will be considerably easier and more economical than when you are in the midst of an emergency.
Secure adequate insurance
Today there is insurance for nearly everything, including health care, life, long-term care, short- and long-term disability, and property. Carefully assess your specific insurance needs, and then fill in the gaps.
Consider other investments
You might also choose to invest some of your emergency cash in mutual funds or other investments. For emergencies, you’ll want to choose funds and investments that are low risk, fairly liquid and easily accessible without significant fees or penalties.
The most important advice of all is simply to get started. If current obligations mean that you can afford to put aside only a minimum amount, that’s OK. Remember that saving $25 or $50 a month is infinitely better than saving nothing at all. And saving when skies are blue beats scrounging on a rainy day, anytime of year.
Kim Bonniwell is market president for Vectra Bank Colorado’s Colorado Springs region. He can be reached at (719) 577-9100.