Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest blog will appear here every Monday.
What does your CASH BUCKET look like?
September is National Emergency Preparedness Month. While the government is urging families to get ready for natural or man-made disasters, I’d like to talk about preparing for a more likely scenario – a financial emergency.
Establishing an emergency fund of readily accessible cash is the most important first step in achieving financial security. I refer to an emergency fund as your CASH BUCKET on my radio show, “Money Matters.” Families without such a cushion are absolutely living on the edge. In the event of job loss or unexpected expense, they face a terrible fall into credit card debt, the loss of a home, or worse. On the flip side, families that have built a viable emergency fund are able to SWAN – Sleep Well At Night.
In order to provide real peace of mind and security, your emergency fund should have enough cash to cover between six and twelve months of essential living expenses – housing, food, utilities, medicines, and transportation. This is a larger fund than what is traditionally recommended, but I believe that in these highly uncertain economic times, where finding a job can take a year or more, you need more insulation than a $1000 bucks!
A family earning $50,000 — and living within its means — should be able to get by on about $2,000 per month. So, at minimum, their emergency fund should be $12,000. That’s a lot of money. But this isn’t an option; it’s a must-do that may require you to re-think your family budget and spending. The first time I tried to establish an emergency fund, it took me several years to hit my goal. The reason: I spent too much, and never really committed to making it happen.
When I finally got serious, I went into what I call personal “economic shut down.” I cut ALL my non-essential spending – restaurants, clothes, movie rentals, vacations!, et cetera – and poured that money into my emergency fund. It was painful, but it worked; and it showed me that I have the ability to actually achieve my financial goals…all it took was a little (or a lot of) discipline!
Now, even if you are in serious credit card debt, the emergency fund still needs to be tackled even before getting completely out of debt. You and I both know that paying off a high interest rate credit card is a no-brainer, but you’ll get to that as soon as you build your family’s six to 12 month cushion! If your debt and interest payments are high, it’s fine to keep the emergency fund closer to six months, then get to eliminating debt. Why do this first? Credit cards can get maxed out, credit lines can get unexpectedly reduced, and credit lines can be shut down. That’s why plastic shouldn’t be used as an “emergency fund!” Only cash, CDs, or money market can pay the bills if you lose your job, your roof starts to leak and your car blows up all in the same month.
So, no matter what your current financial situation is, start plowing away your emergency fund, or CASH BUCKET. Yes, it would be nice to have started yesterday, but today is much better than tomorrow.
Wes Moss is a certified financial planner and is the Chief Investment Strategist at Capital Investment Advisors in Atlanta. Moss is also the host of “Money Matters” on AM 750 and now 95.5 FM News Talk WSB on Sundays from 9 a.m.-11 a.m. An author, “Apprentice” alumni, husband and father, Moss is committed to helping Atlanta’s citizens with financial health.