Expect the Unexpected
Knowing your finances can help you weather the unexpected.
What would you do if you lost the job that provides most of your income, or were disabled and couldn't work? What if you were suddenly responsible for the care of a family member? How would you handle a poor investment decision that cost you a large amount of money?
You can't plan fully for these emergencies, but you can prepare for the unexpected by knowing exactly where you stand financially.
FOR THE RECORDIt's important to have a firm grasp of your short- and long-term living expenses. To find out how much money you need to cover your costs, review your checkbook, credit card records, bank statements, as well as any loans such as school loans or mortgage payments.
Identify all the costs that are essential — food, shelter, transportation, healthcare — and those amounts. Then figure out the percentage of those expenses that your income covers and the percentage that comes from various other sources.
While it can be a little frightening for people to realize how threatened their financial security would be if their income was suddenly cut in half or if their expenses doubled overnight it can — and does — happen.
INFORM YOURSELFYou should know which of your accounts are in your name alone, and which, if any, you hold jointly. You should also look at any retirement investments you might have. When will you have access to these investments? What amount can you expect them to provide?
It's a good idea to know what your health and insurance plans cover in case of an emergency, and whether you need authorization to get emergency treatment.
Also, you should know where all your legal documents are, and how to access them. This can include your keys or codes for a lock-box or safe, your household computer passwords, and your PINs to all bank, retirement, and investment accounts.
EMERGENCY FUNDSNow that you have a grasp on your current situation, you'll be ready if you hit a bump in the road. No matter what you might face, having money set aside during these rocky times will be essential.
Financial advisers encourage people to set aside three to six months' worth of income in a readily accessible account, which you can tap into when you have unforeseen expenses. These expenses may be large, such as funding your elderly relative's healthcare. Or some might be smaller, like replacing your car's transmission.
You and your financial adviser can decide where it's best to park that money, whether it's in a relatively risk-free money market fund, US Treasury bills, or a savings account at your bank.
HELPFUL HINTSWhile you're creating a financial plan for emergencies, it's also a good idea to do the following:
- Organize your financial records in a notebook
- Save your financial records electronically using computer-based software
- Make a list of emergency numbers, including your financial adviser and lawyer, in case someone else has to take over your finances