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Teplitz Financial Group

Hitting a Curve Ball

We've all been there. You are driving a road you've traveled a thousand times when you notice a light on your dashboard. Next thing you know, and a few thousand dollars later, your car needs a new transmission.

Or maybe it is mid May. You are sitting in your living room  wiping the sweat from your brow. You are trying to decide whether or not it is time to turn on the air conditioning. When you do...nothing. Your fifteen year old system finally gave out.

It could be a medical procedure you weren't prepared for. A wedding you are in. A house repair. The loss of a job.   Or one of the countless things that arise in all of our lives that qualify as the "oh that was a one time thing, it will never happen again." But here is the problem...that "thing" happens over and over again.

And there starts the path to financial trouble. You see, most people don't fall short of their financial goals because of some massively bad decision; or because of a singular expense that breaks the bank. No, it happens because people do not plan for the unexpected. For the unknown. People don't have an emergency fund.

It is human nature to pursue the things from which we get the most enjoyment. We put all of our eggs into the new house basket; into a bucket list trip; or a new car. But in so doing,  we leave ourselves without liquidity and no way to adjust when life throws a curve ball.

Several times a year a client ask me a version of this..."I have $5,000, what should I invest it in?" If those clients are honest, they probably hate my answer (which is the same to each and every one of them). The first thing I ask is "do you have a fully funded emergency account?" If the answer is no (which it almost always is) then I tell them to put it there.

It's not like I don't get it...I do. We find money, we want to turn it into more money. Invest it. Buy real estate. Something fun and splashy. The problem is that if you can't afford the "thing that never happens," you will end up putting it on a credit card you can't pay for either. And before you know it, you are more than knee deep in what is a nationwide problem?the more than $1 TRILLION Americans currently have in their possession.

So what does a fully funded emergency account look like? Generally speaking it has at least six months worth of your basic expenses in it. That includes things like your mortgage or rent, utilities, home/auto insurance, groceries, auto payments, commuting expenses, and anything other expense that needs to get paid in order for you to function on financial life support. More simplistically, fill it with six months of your net income. Either way, that money should live in a savings or money market account. It should NOT live in a CD, fixed annuity, conservative investment account or any other type of account that involves risk or assesses a penalty for actually accessing the money. This should be cash money. That's all.

Can you use it? Well, yes...that is what it is there for. But be sure that if you are using it, that you have identified how you are going to replenish it. After all, today's emergency might feel large, but tomorrow's might dwarf it by comparison.

The bottom line is this. Not everyone who doesn't have an emergency account will meet financial ruin. But nearly all of the people who meet financial ruin will see it begin because of an expense, expected or unexpected, necessary or desired, that they simply couldn't afford. And while an emergency account will not cure all financial ills, it will put a buffer between you and what you don't know is coming.  

Think of creating financial freedom is much like building a house. If you put every dollar into purchasing the house you've always wanted, then what happens when you lose your job and can no longer pay that house's mortgage? Sure, it is more fun to pick out paint colors, furniture and new appliances, but if you don't make sure you lay a solid foundation first, all of those fun things will be at risk.