I grew up in an economically challenged family with five kids, one of whom had a major health issue. In today’s parlance, it would be called a working poor household. No matter how hard my parents worked, we never seemed to get ahead. In that very difficult financial environment, I remember many instances when my mom was the alchemist who was able to weave straw into gold. She did this by creating a financial cookie jar for our family.
She diligently put aside coins and extra dollars into an old cookie jar for the situations when we needed it most. She kept the cookie jar hidden away from the kids and my dad, but we knew she had it. When we needed unexpected cash for a school lunch, a trip or other activity, she tried her best to make sure we had the money. It was important to her that we were properly fed and able to attend as many school activities as possible, and she knew a proper education would allow us to succeed in life.
The Need for A Financial Cookie Jar
Do you have a financial cookie jar? Today the cookie jar of my youth is referred to as an emergency fund. You can read the frequent headlines in the media stating that the vast majority of families can’t come up with $400 to cover the cost of an unexpected bill. We also read that with average monthly expenses of about $5,000 (see the Bureau of Labor Statistics at bls.org), most families have much less than that amount in savings for an emergency. These are not what you want to do in the FinancialVerse, you need to establish a financial cookie jar and put as much into it as you can. Start small and work from there.
A good rule to follow is having a minimum of six months of cash expenses on hand to protect you against the uncertainties of the FinancialVerse. The uncertainties include unexpected medical bills, the loss of your job, family emergencies and home or car repairs. You can’t rely on others or crowdfunding sources for these needs; you have to prepare for them yourself.
On a longer-term basis, I am an advocate of building an emergency fund over time that provides one year of expenses in order to protect your family against the uncertainties of today’s economic world. This amount of time is based on two key concerns. The first is we are seeing a work environment where jobs being eliminated faster than ever as new technologies are implemented. If you lose your job you will need to take two actions that take time to complete. (1) Finding new employment or (2) Getting retrained to qualify for a new position. Who is going to pay for these? Most likely it will be you. The second reason is the impact of medical bills. Even if you have health insurance, the cost of deductibles and coinsurance amounts can be significant. In fact, medical bills are the number one cause of individuals filing bankruptcy. You need cash to pay these bills.
Building such an emergency fund does not happen overnight. You need to start out with small savings amounts and add to them as you can. Everyone, even those at low-income levels, need to make this a financial priority. I can tell you from personal experience that these events do happen, and you need to be prepared for them.
What Happens if You Have No Cookie Jar Emergency Fund?
If you find yourself in a tough situation and have no emergency fund what can you do? There are several options, but the financial impact of each should be considered:
Borrow money from your family. This is a viable option but can cause relationship stress and damage.
Reach out to your church to see if they have any programs to provide financial relief to members.
Call your creditors. Reach out to the bank, mortgage company or credit card issuer to see if they will let you stop or lower your monthly payments for some period of time. Many of these organizations have programs to help customers in financial distress. This may reduce your monthly cash outflow to make your situation more tolerable.
If you are a homeowner - use your home-equity line of credit (HELOC) if you have one available. Remember that a HELOC is secured by your home and you could face foreclosure is the loan is unpaid.
Take a loan from a retirement plan such as a 401(k) or take withdrawals from IRAs. Many of these plans allow withdrawals or loans, but be careful about repayment terms and possible income tax issues.
Take a loan from cash value life insurance. If you have a cash value policy you can access a portion of the cash value and get the cash within a few days. Be careful to understand the repayment terms and possible tax ramifications if the loan and related interest is not repaid.
Make a withdrawal from a Health Savings Account (HSA). Remember an HSA is there to pay for medical costs. Be sure to use it as such.
Set up a crowdfunding campaign on GoFundMe or another similar site. This should be looked at as a last resort as the success of these efforts at about 40% is much lower than people think.
Having a financial cookie jar in place for life’s difficult times should be an essential part of your financial plan. In the FinanicalVerse, the definition of financial security is having the cash to pay for things, events or uncertainties when they arise. In doing so, you prevent the need to scramble to find solutions and resources during a potentially stressful time.