Financial Preparedness 101: Emergency Fund to Disaster Survival Kit
If you have followed prominent money gurus and personal finance blogs you are likely aware of the necessity of a emergency fund. Having a fund set aside to handle unexpected expenses is critical to build a successful financial future.
In fact it is so important that you squirrel away some rainy day money, that it would be irresponsible and border on financial malpractice to suggest that you begin paying down debt, saving for retirement, starting a side hustle or even investing prior to building an emergency fund.
In other words, everyone agrees YOU NEED AN EMERGENCY FUND!!!
Dave Ramsey would suggest you have an emergency fund with just $1500 and then you can start pursuing other goals such as paying down debt. If you don’t have $1500 in your rainy day fund then it’s probably a good a target to start. However, if we are being realistic $1500 really isn’t an “emergency fund” its barely a bump in the road fund.
Car repairs can easy cost more than $1500 and lets not even get started on what a medical emergency might cost; ER visit, medications, lost work etc. Relatively minor medical emergencies can easily have you blowing through your fund. We haven’t even began to discuss the cost of a disaster, such as losing your source of employment, lawsuite, or divorce.
Today we are going to go beyond the emergency fund and answer a reader’s question on how they can survive financial disasters.
Question: How do I prepare for Financial Disasters?
This is a common question that I often hear; how to prepare for emergencies. A financial emergency could take the form of an unexpected bill, loss of employment, market downturn, storms or even zombies (ok, maybe not zombies).
While it’s nearly impossible to prepare for every contingency, you can develop a financial preparedness plan so that you can survive most of what life has to toss at you (again, zombies optional).
Financial Preparedness in Seven Steps
1. Maintain an Emergency Fund.
I understand Dave Ramsey and Suze Orman think you can get by on just $1500 dollars. Dave Ramsey lives in a $40 million dollar house and Suze Orman lives on a private island and thinks you can’t retire with less than $6 Million dollars. (God help us all if true)
I’m not trying to take a swing at their success but it’s fair enough to say that may be a bit out of touch with reality. The deductibles on health insurance policies easy exceed $1.5k and thinks are not getting cheaper. If you following Dave’s advice and rocking at old beater car to you Dave job, a car repair could easily blow your emergency stash.
So I don’t want to hear that noise about just keeping $1500 dollars, build a real survive the disaster fund then tackle your financial goals. You will sleep much better knowing you are not one blown radiator away from having a fat goose egg in your emergency fund ledge.
It’s widely recommended that families should have at least 2 – 6 months of expenses in safe savings. Keep some paper cash on hand. While it’s tempting to ditch cash altogether and use the convenience of using plastic payment, the saying Cash is King has survived all these years for a reason. Should the power or internet go out in an emergency, many retailers will not be able to use credit or debit machines to process payments.
2. Invest in Items that will Reduce your Costs.
The markets certainly get a lot of attention, however, some of the biggest returns are made in reducing household expenses. Consider having a home energy audit conducted. By sealing cracks, weather stripping and using quality insulation, the reduction in household maintenance and daily energy bills can pay dividends in good times and in bad.
Given the choice between making more money and reducing costs: eliminating costs is generally preferential for two reasons.
- Costs typically increase greater than the rate of inflation. (When is the last time a bill when down?)
- When ever you make or create a money you have to share some of that money with your Uncle Sam and your nephews State and Local.
3. Focus on Self-Sufficiency.
Buy a recipe book on how to cook zombies. Ok, just kidding, enough about the zombies! Ask yourself what items are you buying now that you could be producing at home? Have you considered gardening, or having a backyard flock of chickens (where allowable, check your city’s bylaws). A small hatchery would net you eggs and protein, but you would also have a product that you can sell if needed.
4. Watch the Real Estate Market.
Once again, house prices are at an all-time high. Do you live in a high cost of living area? Consider selling and moving to a less expensive area and commuting to work. Lower living costs could help you save a cushion in case of an unexpected job loss. Even better: if you can find a place in the country to set up a little homestead or hobby farm, you can practice self-sufficiency.
5. Protecting Your Market Gains
Consider protecting your market gains. If you have money in the stock market, consider options like fixed index annuities or a MEC that offer some upside potential without risk of losses due to market turndowns.
6. Diversify Your Income.
Have more than one stream of income. By having a side hustle or some stream of passive income, you can hedge against emergencies, particularly the loss of employment. There are many options to making make money from home or online, having backup sources of income is the ultimate financial preparedness. Having even a modest source of side income can keep you from needed to exhaust your emergency fund at the first sign of trouble.
Volunteering is a great way to pad your resume, make valuable network connections, and secure recommendations from influential members of the community. It’s also a way to give back to the community you call home.
A great way to get free training (or next best thing) is to volunteer at places like your local fire department, FEMA or EMT training.
Be sure to choose volunteer opportunities that you believe in – the work you are doing is much more important than the lines on a resume. If you choose something that you stand behind, your efforts will be genuine. This will reflect others and create a strong network. If you find yourself in hardship or unemployed, it’s those relationships that can often lead to new opportunities and stellar references.
After all, a herd of zombies can’t be stopped by just one, it takes a whole village.
Panic Now, Avoid the Rush Later
The key to creating a financial preparedness plan is to do the groundwork ahead of time. Whenever the market crashes the mainstream media will write articles on how to survive or prepare for a recession.
Waiting for the market downturn do get your preparations in order is like stocking up for the big storm when it hits, or trying to hit the supermarket after that first reported zombie bit. Doing a little bit of prep work now will ensure that when that “storm” does hit, you will be sleeping easy and won’t make any panicked decisions that may cost you in the long run.