Caught Off Guard

How to secure your tomorrow financially and avoid debt trap in the most grueling events of your life.

Only less than 40% of Americans are able to cover a $1,000 emergency expense using their savings.

Unfortunately for us all, life is full of things no one ever plans. Anything from losing your job to dealing with an unexpected serious health condition could happen any time and for whatever reason.

To study how prepared for such watersheds Americans are, Bankrate have conducted a survey asking the most pressing question: “If you had a $1,000 bill for something such as an emergency room visit or a car repair, how would you deal with such an expense?”

Shockingly enough, out of all participants, only less than 40% would be able to pay the costs from their savings. For those who don’t have an emergency fund, the number one option to go for would be financing with their credit card and paying off the debt later. The rest of the respondents would opt for cutting on other expenses, borrowing from friends and family, or taking out a personal loan.

1 in 10 people would either seek other ways to cover the emergency or don’t know what they would do at all.

Meanwhile, among those who participated in the survey and recently faced a financial emergency, 36% responded that the most substantial unexpected figure they or their immediate family members had to deal with rounded up to as much as $5,000 or more.

Feeling well and fit today, we all want to believe tomorrow will not bring any pain. We feel secure and comfortable with our monthly income. If you’re lucky, you have enough to cover your essential monthly expenses. But do you have any savings that would come in handy in the moment of despair? GO Banking Rates found that 32% of the population of the US have less than $1,000 in savings, while 26% don’t have a penny saved.

Job loss, natural disaster, retirement, death of a spouse or a close family member, illness. We all believe it’s someone else’s problem and it won’t ever threaten us. Still, the reality tells us something slightly different — no one is immune to a grave setback.

With that in mind, let’s hope for the best and prepare for the worst. Let’s talk about savings and their significance in life’s craziest turns.

People buy products not for their value but to make themselves feel better. In the era of digital marketing and consumerism, everything we buy is designed to tickle our sense of unfulfillment and inferiority.

We acquire goods to model a better version of ourselves, at least in our own eyes. Reckless spending on things we don’t need and can’t afford drives us into a corner of financial instability and insecurity.

The best way to start gaining control over your financial standing is to compose your personal balance sheet, a list of your assets, liabilities, and the worth of each item. To put it simply, you have to write down all of the things you own and everything you owe.

By subtracting your total liabilities from your total assets, you will arrive at your net worth — a snapshot of your current financial situation. If your assets are greater than your liabilities, you have a positive net worth, which means you’re doing fairly well. If, however, your liabilities exceed your assets, you have a negative net worth. It’s a wake-up call to take action to improve your personal finance management.

Calculating your net worth regularly allows you to examine your financial health at a given point of time and outline a strategy to achieve your long-term financial goals.

Something you should pay attention to along the way is the liquidity of your assets. Create a separate report where you list your assets in decreasing order of liquidity. Liquidity refers to how easily one can turn their possessions into cash, which may save your life in times of distress. The goal here is to make sure you have enough liquid assets to cover sudden and urgent expenses.

Things like:

• cash in checking
• cash in hand
• money in bank saving accounts
• certificates of deposit
• stocks
• mutual funds

should be on top of your list. While things like:

• real estate
• vehicles

should be at the bottom of your liquidity list and not given priority when dealing with emergency expenses. Such things are called fixed assets, possessions that either require more time to convert into cash or drop in price if you need to sell them quickly.

Measuring the liquidity of your assets means making sure you have a backup fund you can resort to in case of a burning need.

To keep your finger on the pulse and make tracking of your financial standing more efficient try using personal finance tools like Mint. This personal wealth management app allows you to calculate your net worth, help you with smart investing, set spending and saving goals, calculate your emergency fund, and even predict your future expenditures in one go.

With the most liquid assets, one can build a readily available source for dealing with urgent financial dilemmas. There’s no “one-size-fits-all” answer to the question: “How much should be in my emergency fund?”. However, to keep afloat without a steady income, one should consider saving from 3 to 6 months’ worth of your gross living expenses. Think about this emergency fund example: if your monthly expenses add up to a total of $2,000, it means you should lay aside from $6,000 to $12,000.

As a rule of thumb, the bigger the emergency fund amount, the better. However, emergencies come in all shapes and sizes. While some of them don’t have any long-term effects and are easy to recover after, other emergencies may be more financially draining and enduring.

Having two separate emergency funds, one for covering living expenses in case of losing your job, and another one — in the face of a serious illness, natural disaster, or sudden death, may bail you out on several occasions.

When dealing with risk, no scenario is too extreme. Sometimes life throws us a round of curveballs without a chance to recover. An emergency fund of $12,000 may cover your living expenses on a rainy day, but will it be enough to cover both living expenses and a full house repair after a hurricane? How much emergency fund should you have? Will one emergency fund suffice?

Quite often people have to deal with nit-picking insurance requirements where flood insurance only pays for the damage inflicted by direct physical contact with water. The coverage may replace the floor in the kitchen, but your insurance won’t pay for the water that ran up the walls, meaning you will have to dig deep into your pockets.

An emergency room visit for patients without health insurance may cost up to $3,000 or even more depending on the severity of the patient’s condition and the treatment performed. The average cost of a traditional funeral in the US goes up to $7,000 — $10,000.

Some life events make prior calamities seem like a farce. Make sure you have at least $10,000 to recover lost ground in the most taxing uphill battles. Take care of two separate emergency funds. Keep them for distinct purposes.

Many people wonder where they should put emergency funds. Keeping your emergency fund in FDIC-insured checking or savings account is the safest way to prepare yourself for whatever the future holds. However, building an emergency fund is not limited exclusively to stashing. With a high-yield savings account, one can add up to the amount they have initially invested.

With the interest as high as 2% instead of traditional 0.01% and $10,000 in your account, your balance at the end of the year would be $10,200 instead of $10,001. Yes, the harsh reality is that most banks would pay you a dollar in exchange for entrusting them your $10,000 for a whole year.

Choose the banks with the highest interest, low minimum balance and monthly fee. Make the money you’ve earned work for you.

While quite a few banks offer higher interest rates, Acorns, a one-of-its-kind mobile banking app, lets you save in a smart way and invest without risking your savings. Acorns helps you invest, save and spend responsibly for just $1, $2 or $3 a month.

The app lets you learn how to get more from your money with easy-to-understand articles and videos from financial experts, and gets you to answer a few simple questions to get your own investment portfolio built by professionals and personalized to fit your goals.

Whatever you do to create a money cushion, do it wisely. Do your research and never make hectic decisions. Choose what’s best for you.