Emergency planning can be for a disaster like a house fire or an evacuation from a brush fire storm. It could also be surviving after a major storm or earthquake with a particular plan. Of course it could also mean being prepared for that oops in life.
Recently my dog ate a box of something he was not suppose dot and had to have emergency surgery. $8,000 later he is doing better, but can you imagine if we didn’t have an emergency fund? Some people might say that was stupid to send that, but I had the emergency fund and my dogs are extremely important to me. What would happen if I didn’t have an emergency fund? I would have to go into debt or let my dog die. What if that decision was about a child or yourself? What would you do?
Emergency planning is the foundation of any financial or household plan. Businesses have to emergency plan all the time as well. What would happen if you missed your sales goals for a month? Do your bills stop? No they don’t yet many people think credit cards are your cash reserve or your emergency fund.
In fact may people use this strategy and even as a financial advisor when I was starting out I caught myself in that trap as well. It happens to all of us, however it’s how we learn and grow and react to those lessons. I was building a business, and while some people will say that is no way to build a business, I feel sometimes, as long as you are smart about it, that is acceptable. I had all my debt paid off within a year of starting and it was something I worked hard at. Now my wife and I build and emergency fund.
How much should be in your emergency fund? This is where experts differ and argue all the time. The rule of thumb is 3 – 6 months of your expenses. Ideally, I want 12 months of income in the reserves. This doesn’t mean it is all sitting in a checking account, but instead a well-diversified and liquid cash reserve strategy. Something this might include are:
· Checking – 1-2 months
· Savings – 1-2 months
· Money Markets
· The cash box – Petty cash – this is for those quick emergencies where you need cash.
As you identify different needs and goals that will determine what your reserves should be. However, before you do any of that one needs to have a plan. Emergency planning is just one part of an overall financial plan or what I call Personal Strategy Plan ™ and needs to be addressed as an overall part of your strategy. Emergency planning is part of your foundation and a strong part of your overall strategy
What is your reserve level? Do you have adequate reserves? Have you paid yourself first?