How to Plan for Financial Hardships

1. Figure out wants vs. needs.  Determine what you really need to spend your money on (i.e. electricity bill, water bill, food, etc.) versus what you can live without (new clothes or car).  To find out where your money is going chart your spending by writing down every single thing you spend money on for one month.

2. Save AND pay down debt.  After you’ve charted your spending’s you’ll probably find that something is costing you more then you realized.  An example of this overspending might be your daily morning lattes and/or eating out.  If this is the case, find ways to minimize that spending by packing your lunches and/or making your own morning coffee.  Put the money you’ve saved toward paying off credit card debt and/or saving for your emergency fund.

3. Decide where to put the money.  Once you have an emergency fund, the next step is to decide where to stash it.  Savings accounts or money markets are perfect for this.  They don’t make tons on interest, but that’s not the goal for an emergency fund.  You want your emergency fund separate from your regular savings or checking so you don’t spend it.  It’s a small barrier to make you think a little harder about whether you really need to transfer funds to your checking account.

4. Have an emergency fund.  Emergency funds are for people in all stages of life, but they might be most important for those about to reach retirement.  If you lose your job or suffer a crippling financial loss close to retirement, an emergency fund can prevent you from making two difficult decisions:

– First – tapping into retirement savings may (and probably does) have a massive penalty for withdrawing money early.

– Second – filing for Social Security benefits earlier may give you lower benefit amounts than you had anticipated.

Remember, emergency funds are for everyone, after all very few people have such huge cash flow that they can make it through a new engine for their car, a job that ends without warning or a flooded basement.  With an emergency fund, you’ll have a safety net for the unexpected.

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