Everyone has heard the statement, be sure to save for emergencies. But how does this translate into real life and your budget?
To protect yourself and your family from uncertain financial strife, it is important to create a cash reserve. Essentially this is a highly liquid cash account which you can easily draw from in an emergency. Types of situations where you may need this type of cash could be:
• Car Accident
• House Fire
• Sudden Medical Illness
• Theft
• Death
• Loss of Job
• Injuries
• Lawsuit
Of course, none of these things sound pleasant, and there are many more unexpected obstacles that could occur to your family at any time. The point is to realize that an emergency is something unexpected, urgent and unpleasant. By planning for the possibility, at least you have covered the negative financial stress too.
An ideal cash reserve will vary depending on the family and their current financial situation. In order to set aside an emergency fund, try the following steps.
Step 1:
Determine your deductibles on all your insurances; you need to have that amount available at all times in case of an emergency. Also evaluate such insurance options as life and disability.
Step 2:
Evaluate your bare necessity expenses for each month. You should have at least 3 months of those costs saved and some experts recommend as much as 6 months.
Step 3:
Evaluate your potential credit. In some families, credit is an option to cover expenses during an emergency as well.
Step 4:
Place your cash reserve in a savings or money market account. Somewhere you can draw cash from within 24 hours where the amount has no risk of dropping in value.
Now, the exact amount will vary from household to household. A simple recommended formula is to save three months of your salary for a “rainy day.” But, this is not an absolute. For a family who has an income that far exceeds their expenses, this may be unnecessary. In turn, a family who barely makes their expenses each month may not have the extra liberty to save 3 months of a salary. Either way, make it your goal to start a cash reserve today and work towards finding a comfortable amount to have for those unexpected difficulties.
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* Savings: One of the Most Versatile Preparedness Tools
* Disability Insurance is a Must
* 5 Steps for Setting Savings Goals