If You Keep Only 1 Resolution Let It Be This

I won’t tease you with a long intro to keep you guessing.

If you keep only one financial resolution this year frame it around your emergency fund.

For clarity let’s get something straight. Your emergency fund is not your retirement savings (i.e., IRA or 401(k)). It’s not for your golden years. It is for your rainy days. Those times when the car breaks down, the water heater quits or you lose your job. It’s what you use to get you through until things turn around. 

As quiet as it may be your emergency fund is not to be ignored. Like the sourdough starter snuggled in a warm place in my kitchen, you’ve got to check on it regularly, feed it and replenish it when you use it.

It’s a good practice to have different degrees of emergencies and different accounts setup for each. You’ll at least need savings for minor emergencies such as appliance repairs/replacement and then a more robust savings for big emergencies—you know what they are.

To determine how much you need I like to refer to Dave Ramsey’s equation:

#1 How much cash on hand do you have each month?
$________ Monthly income
(-)$________ Monthly savings
===========
$________ Cash available for expenses

#2 Current emergency cash balance
$________ Liquid savings balance
(+)$________ Checking account balance
============
$________ Readily available funds

#3 What percentage of your monthly funds does your emergency reserve represent?
To figure this take your answer to #2 and divide by the #1. In other words your readily available funds divided by the net cash available for expenses. For example, (your answer to #2) #2,000 divided by (answer to #1) $3,500 = 57.1428571. And so your answer to #3 would be 57%.

#4 How long will it last?
Take the answer to #3 and multiply by the average days per month. That’s 30. So, using the example above would be .57 x 30 =17.

That’s how many days (17) the cash reserve of $2,000 would last if the person in our example had no income and no change in spending. That’s an eye opener especially when you remember that it takes 6 months on average to find a job (yes I repeat myself). If you lose your job due to illness or injury you could be out of work for longer.

You might have set high expectations this year for getting your personal wealth to where you’d like to be, but nothing beats being prepared for the unexpected. So even when the frenetic activity at the gym wanes and your pledges to be more organized get lost in the clutter, do yourself a good turn and keep stirring that emergency pot.

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