In part one Carl Carlson from Carlson Financial talked about budgeting and prioritizing expenses.
He touched on deciding where to put discretionary money.
In part two he talked in more detail about the financial cushion we should all have: an emergency fund.
An emergency fund is for unplanned expenses or loss of income. You might have a watertight budget and are good at sticking to it, but if something unexpected comes up, even the best laid out plans might be ruined.
Carlson said some examples might be a costly repair on your house, needing a new car or medical bills. Maybe all of your expenses stay the same, but if you find yourself suddenly without work or unable to work, will you be able to cover your bills?
There is a well known general rule of thumb that you should have 3, 6, 9 months worth of expenses set aside. That can make a big difference in how much we need to save.
Carlson said there are a lot of factors that play into why savings vary for different people, one easy consideration is, are you married and/or a dual income household? If so, the likelihood that you lose both sources of income at the same time is low, so someone in this scenario may need a smaller cushion than a single income household.
If you take the highest income out of the equation, how much of a shortfall will you have each month?
For someone who has already made their budget, that should be easy enough to figure out, Carlson said.
Owning a home is another big factor. Most people who have owned a home for any length of time will probably tell you, it can get expensive very quickly.
If there’s something you know you might need replace or repair in the near future, save up for that as soon as you can. If not, figure out what amount you would like to have available just in case.
If you don’t own a home, you can probably get away with having less in the rainy day fun, Carlson said.
Insurance also affects the amount you need to have in savings. A lot of these risks are insurable, but there is almost always going to be some out of pocket cost.
Think about your auto, health, home and disability coverage and what would be the most you might have to pay out of pocket. For example, if you’re on a high deductible health plan, you might have to pay over $7,000 out of pocket before insurance will contribute anything.
What if this health issue has also left you unable to work? Do you have disability insurance, and if so, when is the soonest you could collect on it?
Carlson said this requires a little bit of thinking, but it’s thinking you’ll be glad you did if any of these things happen.
The majority of Americans don’t have anything saved for these rainy day scenarios – don’t be one of them! Put this at the top of your resolution list for the New Year.