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Published May 12, 2014, 05:19 PM

Financial Wellness: Financial disaster plans also important

Twice the same billboard caught my eye as I drove west on Highway 10. “ ‘Won’t happen to us’ is not an emergency plan,” the Ad Council message read.

By: Sherri Richards, INFORUM

Twice the same billboard caught my eye as I drove west on Highway 10. “ ‘Won’t happen to us’ is not an emergency plan,” the Ad Council message read.

It was referring to making plans in case of a natural disaster, to protect your family’s personal safety.

It’s an important message for your personal finances, too.

Too often we fail to plan for unexpected, and even inevitable, expenses. Not doing so can put a real strain your financial wellness.

Conversely, some prudent financial steps can minimize harm, just like having a disaster plan in case of a fire or tornado.

First, it’s important to have an emergency fund, ideally six to 12 months of living expenses stashed somewhere safe, like a money market account.

This is money you shouldn’t touch unless one of those things we all hope and pray “won’t happen to us” – job loss, illness, a debilitating accident – happens.

It may take a while to build your emergency fund, but patience and perseverance pays off. And while it may be difficult to just let that money sit there, it’s a far better alternative than going into debt if disaster strikes.

People will often talk about other sorts of “emergencies” – the car breaks down, an appliance gives out, the dog visits the vet.

In reality, these aren’t emergencies.

Cars break down. Appliances give out. Pets get sick or need shots. It’s not a matter of if but when and how much.

By stashing money every month for these sorts of expenses (as well as other nonmonthly costs, like gifts and insurance premiums), it’s far less stressful when you eventually face that bill.

Add up how much you spend on average for these sorts of irregular expenses, and divide by 12 to figure how much to save monthly.

We have multiple online money market accounts that we’re able to name. By automatically transferring cash into them each month, we have funds available and designated for car repairs and vet bills. Those outlays don’t feel like emergencies because we don’t have to raid our emergency fund.

Flexible spending accounts through your employer – include day care and health – can be another way to set aside money for inevitable expenses, and reduce your tax bill.

Insurance is also an important component of your financial emergency plan.

Considering our own mortality is a difficult topic, just like thinking about that fire or tornado. But what would happen financially if you died? Is someone else dependent on your income? If so, you need to explore life insurance.

In most cases, I’m not a fan of whole-life policies, which build cash value but also feature high fees. I’d recommend purchasing a less expensive level term policy.

How much insurance is a trickier question, which I’ll explore next week.

Hopefully it will all be a moot exercise – that “it” won’t happen. But hope also isn’t a plan.

Sherri Richards is a thrifty mom of two and Business editor of The Forum.

She can be reached at srichards@forumcomm.com