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When it comes to planning for those unexpected but inevitable financial speed bumps in life, most people seem to think denial is a reasonable strategy.
While there's no way to predict when an emergency will strike or how expensive it will be, an emergency cash fund is your best line of defence.
It's wise to eventually build up a six- to eight-month fund because there's a good chance you won't earn a paycheque for at least that long if you're laid off or become too sick to work.
What not to do. Consumers are quick to pull out their credit cards to pay for unforeseen expenses. That's fine if you qualify for a no- or low-interest-rate card, but not if the average rate is around 12 per cent.
The same goes for borrowing from your pension plan. Here's why: The money in your pension is pre-tax, meaning the government has yet to take its cut. When you take that money out as a loan, you'll eventually have to pay it back, and that's going to come from money you've already paid taxes on.
Then, when you retire and start making pension withdrawals, the same money you used to repay your loan is going to be taxed again.
Plan, don't procrastinate. I appreciate that it will take some time to build up a sizable cash fund, but an emergency could strike tomorrow. As a stopgap, if you have a good credit score, you could shop for a credit card that will charge you no interest or a very low rate. But don't use the card - it's only for a true emergency.
Make it easy. The best way to build up an emergency fund is to open a savings account to which money from your primary bank account is transferred every few weeks. Once people commit to an electronic savings plan, their spending habits adjust to compensate.
Thinking ahead. Here are some other savings possibilities:
Boost your car and homeowner's insurance deductibles. The chances that you'll ever need to make a claim on them are fairly low, and by opting for the higher deductible, you can reduce your overall premium costs by 10 per cent or more.
Use the same company for your car and homeowner's insurance. That can get you a further premium reduction of around 10 per cent.
Ditch your land line if you can get by with just your cell phone. Depending on your plan, you might be able to free up quite some money a month.
Adjust your [federal] tax withholding. Why wait more than a year to get back taxes you paid but didn't owe? Adjusting your withholding means less cash deducted from your paycheques.
That's money you can put to work today in a cash stash.
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