This is the third in what is turning out to be a “living in uncertain times” series (find the previous two below.) The first two were about changing government policies, but of course all times are actually uncertain. Which is why this time I want to talk about a way to plan ahead, so that if our situation changes unexpectedly, we are ready for that, and can reduce the stress associated with it. The tool for doing this is the emergency savings account.

There is always the chance in life that we could have an expense come up that we weren’t planning on. The one that made a big impression on me recently, was when all our outdoor sewer lines failed simultaneously (an emergency indeed!) Or, alternatively, our income could go down, perhaps due to a job loss or illness. Recently, several surveys have shown that most American households don’t have enough money set aside to pay an unexpected $500 expense. There is tremendous stress associated with this – somewhere in the back of our mind runs the knowledge that we are close to the edge. And should a problem actually occur, for example, a job loss, then that situation becomes much more pressured without the resources to carry us for a while until we get it sorted out.

So how to address this? The emergency savings account falls somewhere between our retirement savings (distant future, large amount) and our set-aside accounts (short-term, relatively small amount). It should ideally hold about 3 to 6 months worth of living expenses. This gives us time to recover, money to cover any associated expenses, and the space to put a new plan in place if need be.

And how much is 3 to 6 months of living expenses? To calculate this, take your monthly income and subtract any amounts that you pay for income tax or put into savings. The rest is your monthly living expense. Multiply that by 3, and that is at least how much you want to have in your emergency account.

Take a look at your savings situation. The two things I know that reduce financial stress the fastest are: 1. having a plan, and 2. having savings to back you up. See if some of your savings need some bulking up, and put a plan in place to do that – you will sleep better at night!

Money 101 On-line for Young Professionals — starts September 14th.
Covering all the basics of personal finances, this class focuses on the issues specific to young professionals. It is on-line, so you can join from anywhere. And best of all, some workplaces will pay for it as Professional Development. Sign up by September 1st for the early registration discount. For questions or to sign up, please email me.  And please forward this to anyone you know who might be interested.  Details and sign-up here.

As always, if there is anything that you have questions about, feel free to give me a call. And thank you for your referrals – I appreciate each one.