Have a financial first-aid kit — and use it

Times are stressful enough for you and your minions when emergency situations strike, but are less stressful if you’re financially prepared.

Despite unexpected financial obstacles in the past, you can spare yourself a future headache, thanks to a trio of money experts.

Jim Pavia, money editor, and Jessica Dickler, personal finance reporter, both at CNBC, joined Winnie Sun, one of the financial industry’s most sought-after professionals, to give tips on preparing financial first-aid kits. That includes having an emergency fund.

Legitimate reasons to tap into your emergency fund include unemployment, accidents, disability and severe financial loses to your cash flow.

“It doesn’t always have to be an ‘emergency, emergency,’” Dickler said. “The point is that you are using money you’ve saved instead of borrowing on credit.

“That being said, tapping your fund to pay for things that suit your fancy — hello, beach vacation — will quickly deplete it,” she said.

For Pavia, those funds are nothing to toy with.

“An emergency fund is not your personal money piñata,” he said. “You don’t get to crack it open for any seemingly urgent need. Therefore, it must be a big deal to tap that fund.

“Here are some issues that warrant taking the money out: Serious healthcare issues, losing your job and you cannot make rent or mortgage, emergency surgery,” Pavia said.

An emergency fund raises several questions: How much to earmark for it? Do you change this amount over time? How do you know how much money you should save for the case of an emergency?

The standard emergency fund recommendation is three to six months of net pay — the more the better.

“I don’t like keeping a lot of cash on person or in accounts — three to six months tops,” Sun said. “I like money working hard and invested.

“It’s all about liquidity and knowing where you can pull from in an emergency,” she said.

Pavia agreed that three to six months’ worth of living expenses “is the bar to shoot for. That means for rent, food, debt, utility bills, healthcare — not dining out, vacations or other forms of entertainment.”

He also noted that an emergency fund depends on the person.

“To be honest, why should everyone’s emergency fund be the same when everyone’s need for an emergency fund isn’t the same?” Pavia asked.

“An emergency fund is essentially money that’s been set aside to cover any of life’s unexpected events,” he said. “It’s a way to avoid maxing out your credit cards or borrowing money from family or friends.”

In that respect, it’s better to err on the upside.

“Putting aside three to six months’ worth of expenses is a good rule of thumb, but sometimes it’s not enough,” Pavia said. “If you’re able, you might want to think about expanding your emergency savings.”

Concurring with the three-to-six-month recommendations to cover living expenses such as rent or mortgage — and property taxes and insurance — utility bills, transportation costs and food, Dickler advocated for more funds “if you are the sole breadwinner in your family or in business for yourself.”

Once you’ve saved enough for a generic emergency, you can branch out with other savings. Most people can’t do that. It’s a chore just to save a basic fund.

“This is a great point,” Sun said. “It’s about taking savings in steps. Start with the goals. Then start achieving each one step by step like Lego.

“How much a person should have in emergency funds is very personal,” she said. “Everyone’s financial strength and knowledge, income and discipline would need to be factored into how much should be saved for an emergency. A financial advisor can definitely help with this.”

Age also plays a factor.

“Your level of emergency changes with age,” Dickler said. “As you get older, you face the very real possibility of increased medical expenses. An unplanned bill can come at a severe cost.”

Plan now

Have a financial plan before an emergency. Then when hardship strikes, the shock won’t be as bad and easier to survive.

“It’s important to have a good understanding of where you stand financially at all times,” Sun said.

“It’s not to say that there won’t be money challenges — that’s normal,” she said. “The awareness of what you can and can’t spend or save is super important.”

People of a certain age favor storing funds in safe-deposit boxes.

“My parents and many clients still do this,” Sun said. “Now we encourage clients to keep digital copies of important documents with us and with them. Always give your family a Plan B to reach out to.”

Pavia acknowledged that planning for the inevitable is a sensitive subject.

“None of us wants to map out an emergency plan in case of the death of a loved one — for instance,” he said. “We’d rather live in the moment and deal with this later on.

“However, no one can predict the future,” Pavia said. “It’s safer to expect the best, plan for the worst.”

Keep control

Lack of an emergency fund paints a grim picture.

“The alternative is resorting to high-interest debt to cover an unplanned expense, which can escalate out of control,” Dickler said.

Keep your will and estate-planning documents in a secure place such as a safe-deposit box so you know where there are and more than one person can access.

“Estate planning — including wills and trusts — needs to be in this discussion,” Sun said. “It’s something a lot of people forget.

“I explain it this way: If something were to happen to you, would your loved ones know where to look?” she said. “How can you make it organized and clear so that they aren’t stressed out and completely at a loss?”

Sun added that it’s important to store backup documents.

“Keep them safe in a physical location and have a digital copy,” she said. “For safe keeping, you could also keep one copy of your important documents safely with your financial advisor.

“It’s a good idea to always keep scans of those important documents in case you need the data when it’s been lost,” Sun said.

Be thorough

Dickler emphasized thoroughness.

“The basics are an investment summary and will, plus a list of contacts, including lawyers, bankers and accountants,” she said. “If you don’t have these things, loop in a financial advisor who can help hash it out.”

Pavia added a laundry list of essential documents to have and keep safe:

  • Current insurance policies with agent’s contact
  • Passports
  • Original birth certificates and Social Security cards
  • Copies of any legal documents
  • Living will healthcare proxies
  • Powers of attorney
  • Investment documents along with bank account and retirement plan data

For emergency funds, a stash of cash is OK if in savings accounts or certificates of deposits. There are too many stories of losing money hidden in mattresses, drawers or clothing.

“I don’t keep cash around for this reason,” Sun said. “If you don’t have it, you can’t lose it.

“This is personal, because there are some of us just more comfortable having cash on hand,” she said. “I seldom have cash. I like to keep track of money going I and out of accounts. I use credit cards mostly for that.”

Sun noted that Intuit’s quickbooks is a big time-saver.

“The best thing to do during an emergency is to keep calm,” she said. “The best thing to do before an emergency is to save money.”

Pavia sees both sides to cash — despite his preference.

“There are pros and cons to this,” he said. “Many people feel comfortable with a cash stash. I would avoid it.

“However, there is peace of mind with cash,” Pavia said. “Cash can’t be garnished like a paycheck or bank account, and it isn’t easily traced. For some people, having access to money that flies under the radar, so to speak, may make them feel more secure.”

Dickler said cash by itself doesn’t grow.

“Money under the mattress does sound comforting,” she said. “However, if you’re not at least keeping up with inflation in a decent-yielding savings account, you are losing money in the long run.”

Stay in contact

As soon as there is an unexpected financial setback, contact your creditors, especially your bank. They might have hardship programs, but they won’t tell you unless you ask about them.

“Talk to your financial advisor — if you have one — and definitely your accountant,” Sun said. “Take inventory of all your assets and detail what it will take for you to survive financially.

“You want to know where you stand so you can make your next decisions — where to get help, which job to take, how much you need to cover expenses and so on,” she said.

Pavia cautioned that “if you somehow lose the money, if it gets destroyed in a fire or it gets robbed, it’s gone with little or no recourse.”

He offered these steps in case you have a financial setback:

  • Take a deep breath.
  • File for unemployment.
  • Check on health insurance options.
  • Figure out what to do with your retirement plan.
  • Work on a personal budget.

“If you suddenly find yourself with less money to work with, identify expenses in your discretionary pool,” Dickler said. “This includes vacations, memberships and services like lawn care, which can be immediately stopped to reinstate your cash flow.”

Ways to organize

Online banking is the prime way to organize finances. Checks and checkbooks are almost becoming passé.

“I love simplicity,” Sun said. “For me it’s quickbooks, credit cards and a detailed financial plan.”

Dickler favors online services.

“Just like you would with a fitness tracker, an app like Mint can keep tabs on your spending and find where expenses can be cut,” she said. “I also log on to my credit card account often and have alerts set up for fraud detection — which just came in handy.”

Even with market volatility, continue monthly automatic deposits into investment accounts and retirement funds. Gains and losses will even out, especially if you’re diversified. Don’t try to time the market. The market has its own mind, and it’s not telling.

“I’ve been through a ton of market volatility through the years and accept it as part of what I do,” Sun said. “The most important thing is to have a game plan. If the market falls, this is what I will do…. Plan it out.”

Don’t obsess

Pavia keeps market cycles in perspective.

“Market volatility is inevitable,” he said. “Over the long term, day-to-day market swings are relatively insignificant.

“The most basic — and effective — strategy for minimizing risk is diversification,” Pavia said. “A well-diversified portfolio consists of different types of securities from diverse industries with varying degrees of risk.”

Dickler prefers not to watch ups and downs too closely.

“Dramatic swings are nerve-wracking, but steep declines in major stock market averages don’t translate into dire consequences for your long-term investments,” she said. “There can even be buying opportunities.”

Peace of mind

Insurance — renters, flood, earthquake, life — is smart. You might never need it, but that’s the whole point. Insurance is your piece of mind, knowing you have it when the unexpected arises.

“Insurance is a good idea when you have something to protect,” Sun said. “For example, if you have kids, a business, other loved ones who depend on you — make sure you have sufficient coverage.”

As a foundation of financial stability, insurance is not to be taken lightly.

“Insurance policies play a critical role in our lives,” Pavia said. “Every individual needs insurance cover to get financial relief against uncertain losses.

“Insurance is a way of managing risks,” he said, adding how it helps people every day:

  • Own a home because mortgage lenders need to know your home is protected.
  • Drive a car because few people could afford repairs.
  • Help pay healthcare costs.

“Thumbs up on insurance, but it also depends on where you live,” Dickler said. “To cut costs, shop around, comparing both bundled and unbundled rates. With life insurance, start early. It only gets more expensive with age.”

Live it to know it

For those who want to know more about investments, few things are better than personal experience.

“There is one way to learn these financial lessons, and that is to live them,” Sun said. “To learn how to invest, start investing. To learn to manage money responsibly, start by budgeting.”

Her company has free budget worksheets to download.

The Great Recession taught us that the economy has huge rises and falls. A great way to reduce risk is an indexed mutual fund or life insurance policy. You might not gain as much in the good times, but your principal is protected against setbacks.

“At a very early age, I learned how fragile financial stability is,” Sun said. “My family declared bankruptcy right before I went off to college. That taught me more than any book could teach me about personal finance.

“I’ve learned it’s always important to trust history, to not wait to invest, to not hope for the best, but rather to plan and plan often,” she said.

Pavia has stayed a step ahead of the game.

“I am actually very pro-active and make money work for me,” he said. “I have never been I debt and have always saved money and planned ahead.”

Generalizing generations

With their varied experiences, different generations might have their own take on financial first aid.

“It’s hard to generalize,” Sun said. “In my experience with our clients, GenXers are mostly very diligent about saving and investing for themselves and their families — that’s kids and parents.

“Millennials are good about saving, but less so about investing — not yet thinking about some of the big savings goals like planning for their kids and retirement,” she said. “I hope that will change over time.”

Regardless of which generation you’re in, the experts agreed it’s best to get your finances — and first-aid kit — in order sooner rather than later.

About The Author

Jim Katzaman is a manager at Largo Financial Services and worked in public affairs for the Air Force and federal government. You can connect with him on Twitter, Facebook and LinkedIn.