Being Prepared

Life is unpredictable—there may be times when a downturn in the economy, the loss of a job, a health emergency or other setback takes you by surprise. But, while you may never know exactly what's just around the bend, there are strategies you can use to prepare yourself for many of life's challenges. In fact, a large part of smart financial planning is anticipating the problems you may encounter and being prepared to deal with them.

Saving for emergencies

Financial experts always recommend that you have sufficient cash reserves to provide a cushion if emergencies or setbacks strike—which at some point, they usually do. In fact, having reserves is so important to your financial security that it should be a priority when you're setting your goals and allocating money to meet them.

Think of these cash reserves in two distinct categories. The first is a rainy day fund, containing perhaps $1,000 or $1,500 that you can use to pay for smaller, unexpected expenses that can set you back, such as car repairs, a household appliance that breaks down or a leaky faucet that requires a plumber. Certainly these expenses can be put on a credit card, but having the cash on hand in an easily accessible account can make paying off that credit card bill immediately when it comes due much easier.

The second account is more substantial and may take a bit more time to establish. This is your emergency fund. It's designed to cover more severe situations, such as losing a job, a divorce, an illness or injury requiring an extended hospital stay or a short-term disability. When situations such as these occur, having at least three to six months' worth of living expenses (or more, if possible) can mean the difference between recovering from a temporary financial setback or the beginning of a financial disaster.