New Years Resolution - Part 2

For the people who have Resolutions to manage their finances better; I will be writing a different "tip" every day for the 1st week of the New Year. Since everybody's starting and ending points are so varied, I will try to stay away from specific recommendations, rather guidelines to building a solid financial foundation.

DAY 1: CREATE A BUDGET

DAY 2: ESTABLISH AN EMERGENCY FUND!

I often hear an "emergency fund" be described as 3-6 months of the household income set aside for an emergency. I usually like my clients to take a closer look at it. In my opinion, an emergency fund actually has more to do with expenses than it does with income. Another reason why creating a budget is so important is that it allows you to cut out the things you can go without if you were out of work (certain entertainment, dinners out, hobbies) and come to a baseline NEED for core expenses each month. An emergency fund should be able to cover your basic needs for 3-6 months.

Be careful...an emergency is not "I need to go see Mickey Mouse"...an emergency is; a tree falls through the roof, the hot water heater explodes or someone loses their ability to work through lay-off, business closing, health issue or disability. Also, consider that emergency fund to be money that is no longer yours. Do not "borrow" from it or use it for reasons other than what it's designed for.

Why is 3-6 months the sweet spot?

Think about if you lost your job, without warning, yesterday. Even in a sought-after profession in a solid work market; between 1st interviews and 2nds and offers and start dates...it wouldn't be unrealistic for it to take a month or 2 to land one you want. If you found out after that couple of months it wasn't going the way you thought, 6 months just allows you a little breathing room. If you are one half of a working couple or have a good amount of liquid assets, maybe keeping that # closer to 3 makes sense.

What should it be held in?

That depends...although I believe the default answer is probably a local bank or credit union, there are a lot of vehicles that can be used depending on overall assets, lifestyle and comfort levels. It should be safe, liquid and earning at some rate higher than "the sock drawer". It should not be "expensive money"...meaning, for most people, it's a bad idea to use a 401ks, IRAs, retirement accounts, tax-sheltered savings, certain annuities and other accounts that may require increased taxes, penalties and fees.

Do your research and, if you get stuck or aren't sure what it all means, DON'T GET OVERWHELMED AND QUIT...call a qualified professional to help. You can always PM or call me if I can help in any way.