Credit Card Education

Expect The Unexpected

Knowing your finances can help you weather the unexpected. What would you do if you lost the job that provides most of your income, or were disabled and couldn't work? What if your partner died or you were divorced and could no longer count on your spouse's income? How would you handle a poor investment decision that cost you a large amount of money? What if you had elderly relatives who needed your financial help to cover their health costs? You can't plan fully for these emergencies, but you can prepare for the unexpected by knowing exactly where you stand financially.

For the record

It's important to have a firm grasp of your short-and long-term living expenses. To find out how much money you need to maintain your lifestyle, you can review your checkbook, credit-card records, bank statements, loans, and mortgage payments.

Identify all the costs that are essential - food, shelter, transportation, medical - and total those amounts. Then figure out the percentage of those expenses that your income covers and the percentage that comes from various other sources.

While it can be a little frightening for people to realize how threatened their financial security would be if their income was suddenly cut in half or if their expenses doubled overnight, it can - and does - happen.

Inform yourself

You should know which of your accounts are in your name alone, and which, if any, you hold jointly with your partner. You should also look at your pension plans - and your spouse's pension as well, if you're married - and your retirement investments. When will you have access to those funds? What amount can you expect them to provide?

It's a good idea to know what your health and insurance plans cover in case of an emergency, and whether you need authorization to get emergency treatment. Also be sure you know where copies of life insurance policies are and whom you must call to file a claim.

Finally, you and your partner should both know where all your legal documents are, and how to access them. That can include your keys or codes for a lock-box or safe, your household computer passwords, and locations of all your bank, retirement, and investment accounts

Life's bumpy road

Once you have a grasp on your current situation, you'll be ready if you hit a bump in the road. No matter what you might face, having money set aside during these rocky times will be essential.

For instance, what if the furnace in your home has to be replaced, or the roof of your house springs a major leak? Or what if you're facing a more long-term challenge such as providing for a disabled child?

Emergency funds

One thing you can and should do is build your own emergency fund. Financial advisers encourage people to set aside a minimum of three to six months' worth of income in a readily accessible account, which you can tap into when you have unforeseen expenses. These expenses may be large, such as funding your elderly relative's healthcare or putting some extra cash into your small business. Or some might be smaller, like replacing your car's transmission or buying a new refrigerator.

You and your financial adviser can decide where it's best to park that money, whether it's in a relatively risk-free money market fund, or a savings account at your bank.

Another view

Some experts argue that its better not to keep too much of your emergency money in low-risk bank accounts. They suggest you may want to keep a portion of your funds in a variety of short-term investments, which you can sell if you are ever in need of emergency cash. Otherwise you may risk losing too much buying power to inflation.