Dear Readers,
What would happen if you were hit with an unexpected medical bill, a layoff, or your adult son or daughter needed a quick loan to get out of a financial jam? According to the Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2015, 47 percent of respondents said they wouldn't be able to cover a $400 emergency expense or would have to borrow or sell something to come up with the money. That's a pretty scary statistic.
So I ask you, could you come up with $400, or $1,000, or $2,000 to tide you over in the face of a financial emergency? If the answer is no, or you're not sure--or even if you're pretty confident that you could--I hope you'll take a few minutes to read on for some practical tips on how to prepare yourself for just such an emergency. To me, it's just part of good financial planning.
- Build up a cash reserve--I'm sure you've heard it before, but have you done it? To protect yourself, you really should have enough cash available to cover a minimum of three months essential expenses; ideally you should aim for six months. Keep this money in something liquid like a savings account.
It may sound like a lot all at once, but you can build it up slowly. Designate a specific account as your emergency fund and make deposits to it a part of your monthly budget. Make it easier by setting up automatic payments to this account. Then commit to not touching this money unless there's a real financial emergency.
Also, if you own your home, consider establishing a home equity line of credit. A HELOC gives you an additional cash resource, and you only pay interest on the money you use. Of course, you have to pay it back, but the payment schedule is generally over a 10-year period. Hopefully, that would give you enough time to recover financially.
Consider personal liability insurance to protect your assets should a third party file a claim against you. It's often part of automobile or homeowners insurance, but a separate umbrella policy is also available at reasonable cost. If you're in your prime working years, you may want to look into disability insurance. Long-term care insurance is also worth exploring.
What to do if you find yourself in a financial jam
Even the best-laid plans can be upended by an unexpected crisis. If you find yourself struggling financially, here are a few things you can do to help ease your burden until things get better.
First, carefully examine your expenses and reprioritize your spending. Cut out everything but the essentials--things like mortgage or rent, food, utilities, insurance. Pay the minimum on outstanding credit or loan balances. If you're unable to pay a bill, contact your creditors right away. They may be willing to negotiate a payment schedule or waive late fees. I'd suggest doing this yourself rather than falling victim to a potentially costly debt management or consolidation scheme.
Finally, even if it's possible to borrow from your 401(k) or take a hardship distribution from your IRA, I'd consider this a last resort. While present circumstances may be difficult, I'd counsel anyone to avoid jeopardizing their future retirement unless absolutely necessary.
Prepare now
October is financial planning month, so I encourage you to take this time to review your financial situation and make sure you're as well prepared as possible for the unexpected. It only makes good sense because financial emergencies can happen to anyone--even to you.
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Looking for answers to your retirement questions? Check out Carrie's book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."
This article originally appeared on Schwab.com. You can e-mail Carrie at askcarrie@schwab.com, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Asset allocation and diversification cannot ensure a profit or eliminate the risk of investment losses. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Diversification cannot ensure a profit or eliminate the risk of investment losses.
The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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