Emergency Fund Can Keep You Prepared For Crisis
Last week this Janet Colliton discussed a very personal experience regarding a fall and injury where she got help from experts like a personal injury lawyer and shared the hospital experience from the inside. This week I want to share something I did almost unconsciously before that time that made an enormous difference to me and can make a great difference for you.
It is to set up an emergency fund in advance – a very specific type of emergency fund. For these past 19 years I have been writing about planning ahead. It took time with an actual injury to see what really works. Here is what I learned and why it can, in time of crisis, save you from financial distress.
• An Emergency Fund – What It Is
Recent surveys show that many American individuals and families live paycheck to paycheck. For small businesses, the difference could be client to client. Our office over the past 19 years has reviewed the financial circumstances of hundreds, if not thousands of families, some in distress and some looking to maximize returns or plan estates.
Remarkably, some individuals who have relatively small incomes have managed to save quite a bit. Others who begin with sizeable assets or income might not. The difference is not just in spending patterns and cannot just be written off to buying extravagantly. Many savers begin a “set it and forget it” type plan, something that works automatically regardless of their ups and downs in income and expenses.
• What An Emergency Fund Is Not
Here in my experience are some of the alternatives to an emergency fund that are not the answer.
An Emergency Fund is not credit cards. If you have a sizeable credit limit on credit cards available, the temptation where there has been a catastrophic event or injury might be to fall back on credit card spending. While this is understandable, credit card debt can be one of the most difficult to erase if for no other reason than the extremely high interest rates. While credit card spending might increase somewhat during disability this should be very moderate if at all. Credit cards are not an emergency fund. In addition, if you suffered a slip and fall injury as a result of negligence of a person or an establishment, then you may have a case you can fight for; a personal injury lawyer can help. Contact a local personal injury lawyer for legal assistance.
An Emergency Fund is not a home equity line of credit. The question is do you really want to put your house on the line to take care of a shorter term emergency. What often happens is that people begin to draw down on their home equity credit line and it does not stop there. In a relatively short time the equity in the home can be exhausted or nearly so and this is on top of the cost of the original loan. The temptation is to look at the required monthly payment which is low and ignore the overall cost. It can be a big mistake.
An Emergency Fund is not money mentally earmarked in a regular account. Often you will say to yourself you have enough money in a regular account to take care of emergencies.
Here is a secret I have learned. An emergency fund needs to be invisible and work in the background. Remember this – if you see it, you will spend it. The next time you see a special deal or a desired product or service, that money will likely be gone.
An Emergency Fund Is Not Your 401(k) or IRA or even your disability insurance. Even if you manage to navigate tax rules regarding IRA withdrawals by reason of disability and even if you have short term or long term disability coverage, the funds might not be readily available.
Also it is not a good idea to tap into your retirement prematurely unless really necessary.
• How To Set Up An Emergency Fund
Years ago I went searching for a banking service that would automatically transfer funds from one account to another in a different bank periodically in a specified amount regardless of circumstances. On-line banks and some traditional banks and credit unions could do this easily. When emergencies strike, you might be surprised how the fund you never counted grows over time. Years ago employees often had automatic deductions for savings bonds. Banks had Vacation Clubs to save for vacations and Christmas Clubs for Christmas spending. Now individuals should think of automatic savings accounts for emergencies. They can give great peace of mind for shorter term disabilities.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.