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Creating a Financial Back-up Plan

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MONEY

In this uncertain economy, it is important now more than ever to have a financial nest egg. Without a financial back-up plan, a large number of families are one incident away from collapse. It could be something as simple as new tires for the car, to a major health crisis.

A recent State Farm survey shows that fewer than half of American families have a financial back-up plan.

People are caught financially off guard all of the time; from a busted water pipe to a death in the family. Additionally, having a job right now is no guarantee of financial solvency; you could lose your job tomorrow.

Without a back-up plan or emergency fund, you put yourself financially at risk. With wages getting smaller and everyday bills getting larger, a financial safety net is a necessity. Before retirement, or before any kind of investing, you must invest in everyday financial security. Understand that a financial back-up plan does not mean retirement accounts. You are saving money that will allow you to responsibly react to emergencies that could arise today, next week or next month. At this point in time when workers see retirement being further out of reach, I would actually advise you to lower retirement plan contributions and put more money in a financial safety plan, since you are more likely to use that in the short-term.

A financial back-up plan does not include withdrawing funds from your 401k, which leaves you vulnerable later in life, and typically, if you withdraw those funds for anything other than retirement, you may be required to pay them back or face tax liability on that amount; or credit cards (creates debt for you to repay). Furthermore, most rainy day funds, Christmas clubs, etc. are already under strain or completely wiped out due to the increase in everyday expenses.

What this plan does is give you added resources in case of a serious emergency. After a job loss, it is taking at least a year to find equivalent employment, one faces increasing health care expenses, and home and car repairs can be costly. As I speak with individuals that have been unemployed for over a year, they complain that COBRA health care can be expensive, and there are costs associated with looking for a new job, whether it's sending out your resume or transportation to get to interviews.

As a responsible adult, one must take all of these possibilities into consideration. Without a plan, when financial difficulties arise, it can cause a downward spiral of debt and consequences that can take years to recover.

A solid plan should include a savings account with eight months of living expenses, adequate insurance and perhaps, even a secondary source of income.

The most important element of creating a plan with endurance is getting started. I get questions all of the time about how to save when you feel like you have no money. I always say that you would be surprised where you can actually cut back. That daily latte, home delivery of the newspaper (you can read most papers online now), premium cable channels (choose one maybe two, but you don't need four), and of course, review your cell phone plan to see if there are services you don't need.

Making these sorts of changes can easily gain you an extra $50 to $100 a month to set aside for saving. And once you do start saving, leave that money alone, unless there is a true emergency. A real emergency is not a clothing or furniture sale or a night out with friends after a long week. All of us struggle with this, but in order to turn this corner, it is crucial that we understand needs versus wants in this new economy.

We are now in a place economically where you have to work harder and longer to earn the same amount of money, and that money does not go as far as it used to. Saving is imperative. A financial nest egg gives you peace of mind that when emergencies happen, and they will, you will be able to handle them.

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