Emergency funds are no luxury today

October 2, 2012 

Have you ever stressed over an unexpected large bill at the mechanic? Do you know someone who got downsized last year and is still looking for gainful employment? Anyone replace an A/C unit in the middle of summer?

Many Americans deal with these common problems by using home equity lines, charging credit cards or withdrawing from investments intended for retirement.

A preferred alternative is to maintain an emergency fund that will give you peace of mind. It may feel like you can't create an emergency fund, but with our existing economic woes, you really can't afford not to have one!

Emergency funds are an easy to access stash of money to use only in case of emergency. A true emergency threatens your family's survival, not your desire to have all of life's comforts.

Those with a cushion are less likely to accumulate debt and raid their retirement savings.

How much is enough?

Experts have varying opinions about the desired amount. Your personal situation should dictate the size of the emergency fund. Consider income, expenses, family health and work stability.

At a minimum, I believe three to six month's worth of all expenses is a good rule of thumb. I encourage retiring individuals to have one full year of expenses set aside.

How to do it?

After deciding on the amount, double check to make sure you're meeting basic living expenses. Then start saving into the emergency fund right away. This can be as easy as sending $100 to a savings account every month.

If possible, have an automatic deposit done each month on the same date so you don't have to think about it. As it grows, focus on reducing your discretionary spending and avoid racking up anymore consumer debt.

If you are honest with yourself, there are common comforts and expenses you could eliminate to gain financial stability.

It's also wise to keep the money somewhere that's not easily accessible. Have the account at a bank across town or with a reputable Internet bank.

Don't have an ATM or debit card tied to the account. You will still haveaccess to the cash, but getting it will require extrasteps and thought before making a withdrawal.

Our economy is going through a rough patch right now. There isn't a lot we can do about the national economy but we do have complete control of our personal economy. After meeting your basic needs, an emergency fund is one of the most important planning steps you can take.

The financial security game is won by the most prepared to outlast the tough times. The reality is those with a back-up fund are going to be in better shape over the long run than those without one.

Kris Flammang, co-founder of LPF Financial Advisors with offices in Lakewood Ranch, can be reached at 941-907-0101 or kflammang@lpfadvisors.com.

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