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Expecting the Unexpected: Building Your Safety Net

Financial Planning

January 2003

Expecting the Unexpected: Building Your Safety Net

Are you prepared for an emergency? Or an unexpected job loss in your family? A recent survey found that 40% of Americans are not prepared for unexpected changes and would suffer financial hardship in as little as one month.

If you are part of the group that does not yet have your emergency fund tucked away then this is a great time to start one. While experts differ on how much to save and where to keep it they all agree that having a safety net like this is a necessity in today’s uncertain economic environment.

Three Questions to Consider When Preparing Your Savings Plan

1. How Much Will You Need?

The basic rule of thumb is to keep three to six months of living expenses available. Living expenses include only the basic necessities like shelter, food, transportation, medical and life insurance, and utilities, etc. Discretionary items like entertainment and personal services are not included.

To determine whether you will need three or six months depends on your individual situation. If your job seems to be secure and you have alternate sources of immediate income you may only need three month’s worth of savings. On the flip side, if you are dependent on a single income, work seasonally, or are self-employed you should consider keeping six month’s worth of expenses readily available.

2. How Do You Begin Saving?

It can seem overwhelming to start a savings plan, but it is easier than it seems. There are a variety of ways to begin saving today, and you will only benefit from building this habit in your financial planning.

The easiest way is to have a systematic deposit made into an account you designate for “emergencies only”. You can have a monthly withdrawal from your checking account or paycheck, and this relieves the burden of remembering to do it each month. Ways to make an immediate impact on your savings would be to cut out unnecessary expenses, saving the money you would have otherwise spent. Also, consider delaying big purchases, such as a car, for the short-term. Other options include saving tax refunds or bonuses.

3. Where Will You Park Your Money?

Because these funds are for emergencies, they should be kept in a safe place where they are easily accessible and risk averse. Savings accounts, Money Market Accounts, and Certificates of Deposit (CDs) are the three most commonly used methods since they are low risk. There are some factors to consider when determining the best fit for your needs.

Money Market and Savings Accounts both offer instant accessibility but most likely offer a lower interest rate then a CD would. One approach may be to diversify your savings across more than one type of accounts. This would provide you with staggered income over a period of time, such as using a Money Market Account for one or two month’s expenses and then holding another two month’s savings in a 90-day CD.

Other options for housing your money include short-term treasuries, short-term bond mutual funds, or Roth Individual Retirement Accounts (IRAs). Consult with your tax advisor before you make a move with these options, as they will know how best to direct you.

By saving now you will be prepared for future emergencies, and you will have peace of mind knowing that you can expect the unexpected—with confidence.

We wish you best in 2003!
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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