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Don’t be Penniless when Disaster Strikes

 

You never really know when disaster is going to strike, right? Let’s say extreme weather destroys some, or maybe all, of your belongings. Or you’re suddenly let go of employment during a really bad time for hiring. I could list potential disasters all day, but perhaps it’s best to get down to brass tacks: you need an emergency fund if you want to ensure you’re not stuck penniless if disaster strikes.

A better definition of ‘emergency’

If the scenario you find yourself in means that you need a large amount of cash as soon as possible, then the chances are that you’re in a financial emergency. And no, I’m not talking about the kind of ‘need’ for cash that you have when you want to buy a new 100-inch Ultra HD TV. I’m talking about destruction, a death in the family, medical bills, that sort of thing. Very unfun stuff, you’ll notice. (Although maybe that picture of the Hindenburg disaster was a bit of an overly dramatic choice.) We’ve got some more examples at www.completepersonalfinance.com.

 

Do I need an emergency fund?

Well, you certainly need to have some kind of safety net in case things go south all of a sudden. (No offence to people living in the south.) There are definitely financial situations people are in that perhaps mean they don’t need to worry too much about an emergency fund. If you earn a lot of money, too much to spend in a reasonable amount of time, then this lessens your need for a fund. Being free of debt also helps. Perhaps the best alternative to an emergency fund is really good insurance, though savings are still recommended. Read more about all kinds of insurance at www.oklahomainsurancequotes.net.

How much to save

So how much should you actually place in your emergency fund? Many people would claim that you should save at least six months’ worth of living expenses. But, when you think about it, this is an awful lot of money. You don’t want to put yourself out too much when you’re saving! And such a saving will probably take around 18 months, usually more. If you can do this, then you’ll certainly have a great safety net. But perhaps, at first, you should aim to have three or four months’ worth of living expenses saved up. Really, you should aim for an amount that helps you feel secure. Read more at www.wisebread.com.

Liquidity

Of course, you may already have a bunch of assets that are worth quite a bit of money. It’s true that these can be very comforting when it comes to the potential for disasters, but you need to keep something in mind: liquidity. This refers to the speed at which you can actually turn an asset into cash.

Let’s say you have a car you don’t use all that much, but it’s worth a good $10,000 or so. (Nice!) You decide that an emergency fund isn’t really required for you or your family; after all, that car is the emergency fund, right? Well, you have to keep in mind how long it will take to get that money. You can’t click your fingers and have the car turn into cash. You need to get out there and actually sell the thing – and this can be a pretty long process. Read more about liquidity at www.money.howstuffworks.com.