Many individuals will experience an unexpected event such as a decrease or loss of current income, a major illness, and/or a large unexpected expense during their lifetime. Today, I’ll discuss briefly how to properly create and use an emergency fund to help effectively manage these types of life transitions.
An emergency fund is of primary importance for most individuals and is likely the first type of financial account an individual should create. It is a form of self-insurance and is intended to be a “safety net” to help deal with financial emergencies individuals may experience. Emergency funds should NOT be considered a part of regular savings for expected future purchases or expenses. When appropriately planned for and implemented, an emergency fund can help a person avoid taking on additional debt through credit cards, lines of credit, or other types of loans during periods of crisis and transition.
Safety of principal and quick access to funds are important considerations when determining what type of account to use for an emergency fund. Because of this, it is usually most appropriate to use a basic savings account held with a federally insured banking institution that can guarantee the full amount to hold these funds. It is very important to also make sure to avoid accounts that may offer better returns but could lock up the money in a time when it may be needed.
While financial experts may differ on the appropriate amount to hold in an emergency fund (many saying anywhere from three to twelve months), it is important to have enough money on hand to pay essential expenses for several months. Prior to experiencing a financial emergency, it may be a worthwhile exercise to consider how one might answer questions such as: What are my current expenses? What expenses would I have and truly consider essential in a period of financial emergency? What are the most realistic financial emergencies I might experience? How long might this emergency period last? What other resources might I be able to utilize in an emergency situation (i.e. federal unemployment income)?
Change can be unsettling, especially for those who are not prepared. Often, even the best events in life – a birth, new job, or dream relocation – can be more rewarding by having a financial plan. Payne Wealth Partners and Keystone Financial Consulting are purposely built to provide clarity, confidence, and peace of mind in the face of a life transition through a planning-centric solution that is relevant to each individual’s unique situation. No one knows the future, but everyone can prepare for it.
Let’s start a conversation about wealth management that’s focused on planning for the past, current, and future change and ultimately what is most important to you.
Published: January 27, 2016
Authored by: Joshua R. Wichman, CFP®, MBA
Direct Phone: 812-602-6319
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