As a Certified Financial Planner® practitioner, one of the first things I learned in working with and helping people prepare for the long haul is the creation of "The Emergency Fund": a sum roughly equal to 6 months household expenses held in a liquid account accessible for emergencies- yes, the one you never figure would happen. Let's look at a real life example...
I have a client who is with me for over 30 years -rather, he and his family is. You see, I've been helping with the family finances for 3 generations in their family now, not unusual for me. I have a few dozen families of which I've dealt with 3 generations, and in 4 cases, I’ve touched 4 generations in the same family. I can't begin to tell you the self-satisfaction I have had being taken in the confidence of all involved, and the pleasure of being "a part of the family." In this case, it was between the second and third generation, parents and adult child. The "child," now 30 years old, has been struggling with an ailment that the insurance company (need I say more) felt the course of care was quite different from the opinion of the doctor. This brought the child to a very serious decision- go with the insurance company's diagnosis and course of treatment and be covered, or go with the real-life decision going with the trusted doctor’s course of treatment and not be covered because they the insurance company refused to agree with the doctors course of care- and not pay for it. Since it's not up to me how to advise a client what to do with their body, I write to give you a real-life example, not to judge. Clearly, the adult child and parents wanted to go with the course of treatment prescribed by the doctor although not covered, and the cost was to be $30,000- payable up front. Because we kept a family emergency fund set aside with liquidity, within 1 day I was able to give the client the $30,000 needed from their account and let the child have her surgery- we'll fight it out with the insurance company later. The main goal was to be ready at any time should something like this arise, as remote as it may be. Everybody thinks these things won't happen to them…until they do.
An emergency fund is one of the first things we work on establishing when doing a financial plan for a client. Emergencies that come up unexpectedly can come in the form of medical, a new refrigerator, household repairs like a new roof or hot water heater, or anywhere in between. For me personally, just last month I found the whole drive train failed in my Jeep, and out of the blue found myself hunting for a new car- with an unplanned expense for a down payment. Nothing is cheap anymore, from $10,000 for a new roof to $10-$20,000 for a down payment on a new car. I am often asked to define what constitutes an emergency. It's easy, I say... when you take out the withdrawal slip to fill out, just ask yourself one question: "Would Neal constitute this as a REAL emergency?" I'm told by clients who found themselves in this situation that 9 out of 10 times they put the pen down, and left the bank. Amazing how powerful the power of suggestion is! As a Planner, I'm not tough, but very effective!
We live in a society of believing it will always happen to the other guy, the next one in line. As kids, we were invincible, and as adults, some of that fallacy still carries through. We may not be invincible, but a belief that we are impervious to catastrophe surrounds us all. We live in our cocoon of a lifestyle, surrounded by that which we believe will protect us from harm and a surprise we can't handle. I am sorry to inform you that none of us are impervious to an unexpected catastrophe of any proportion- it can, and most probably will come at some time in our life. If you are not financially prepared for it, it will only make the occurrence exponentially worse, but may be life threatening as well. The goal of having a liquid fund equal to 6 months of your household expenses should be on the top of your list for saving for, in addition to or before your 401(k) or other savings goals. Let's put it another way... if you're faced with a life threatening catastrophe that can only be accomplished with the proper funding and you don't have it, anything else you are saving for is moot if you're not going to be here to experience it.
