How to Formulate a Financial Back-up Plan

In this uncertain economy it is important now more than ever to have a financial nest-egg. Without a financial back-up plan, a large number of families are one incident away from collapse. It could be something as simple as new tires for the car to a major health crisis.

Recent surveys have shown that fewer than half of American families have a financial back-up plan. People are caught off guard financially all the time. From a busted water pipe to a death in the family. Also, having a job right now is no guarantee of financial security because you could lose your job.

Without a back-up plan or emergency fund you put yourself financially at risk. With wages getting smaller and everyday bills getting larger, a financial safety net is a necessity. Before retirement, before any kind of investing, you must invest in every day financial security. Understand that a financial back-up plan does not mean retirement accounts. You are saving money that will allow you to react to emergencies that come up and that could be today, next week or next month. And at this point in time, workers see retirement being further out reach, I would actually advise you to lower retirement plan contributions and put more money in a financial safety plan since you are more likely to use that in the short term.

A financial back-up plan does not include withdrawing funds from your 401k (leaves you vulnerable later in life and typically if you withdraw those funds for anything other than retirement, you may be required to pay those funds back or face tax liability on that amount) or credit cards (creates debt for you to repay). In addition, most rainy day funds, Christmas clubs, etc., are already under strain or completely wiped out due to the increase in everyday expenses.

What this plan does is give you added resources in case of a serious emergency. After a job loss, it is taking at least a year to find equivalent employment, healthcare expenses are on the rise, and home and car repairs can be costly. I talk with individuals myself that have been unemployed for over a year, COBRA healthcare can be expensive and there are costs associated with looking for a new job, whether it’s sending out your resume or transportation to get to interviews.

Without a plan, when financial difficulties arise it can cause a downward spiral of debt and consequences that can take years to get out of. A solid plan should include a savings account with at least 8 months of living expenses, adequate insurance and perhaps even a secondary source of income.

The most important element is getting started. I get questions all the time about how to save when you feel like you have no money. I always say that you would be surprised where you can actually cut back. That daily latte, home delivery of the newspaper (you can read most papers online now), premium cable channels (choose one maybe two, you don’t need four) and of course, review your cell phone plan to see if there are services that you don’t need.

Setting up an emergency fund while necessary is not easy. I wanted to offer a few practical tips for getting started:

1. Make sure that your tax forms are filled out correctly. Oftentimes people think they are supposed to get a big tax refund each year. Actually, what a large tax refund means is that you have not taken the right amount of deductions. If you spread that tax refund out over a year of paychecks that could easily end up being $100 to $150 more in your paycheck. Instead of giving the government an interest free loan put that money in your savings account.

2. Seasonal employment – I have always been a proponent of having multiple streams of income. Seasonal employment or a part-time job is definitely the way to go. This will not only give you extra cash to save, but could also help with paying down any lingering debt you may have faster.

3. Trick yourself into saving – set up automatic payroll deduction. Even if it is just $20.00 per pay period, it is a good way to save because you set it up and forget about it. It adds up quickly.

Don’t think that you have to have hundreds of dollars to save each pay period. It is making the commitment to saving that is most important.

A financial nest egg gives you peace of mind that when emergencies happen, and they will, you will be able to handle them.

With these practical tips, you will be well on your way to financial health.

Black Enterprise Columnist Jennifer Streaks is a Financial Expert, Author & Pundit.Continue the conversation by following her on twitter @jstreaks or on her website