Sunday, August 15, 2010

Financial Preparedness, Part I

The American people are feeling pretty light in the pocketbook at the moment. I don't have any solutions for our national economic problem, but I do know a way you can build a strong financial future for your family. Dave Ramsey has come up with a common-sense plan you can use to become financially prepared. Over the next few weeks I will be discussing Dave Ramsey's Seven Baby Steps and applying them to preparedness.

Baby Step One: Create an $1,000 emergency fund

The first step towards achieving financial freedom is saving money for an emergency. Dave says you should start with the amount of $1,000. You are not to touch this money unless it is a true emergency.

Your furnace dies in the dead of winter = EMERGENCY
Your car needs a serious repair = EMERGENCY
You lose your job = EMERGENCY
You run out of Diet Coke Zero and you have spent all the money you budgeted for soda = NOT AN EMERGENCY

That is something I have to repeat to myself regularly.

The reason you should start with this step instead of immediately tackling your debt is that the unexpected WILL happen. We have had a ton of medical expenses in my family this year. Some were expected (the birth of Baby Dear), some were not (two family members needing an MRI). If you don't have any money on hand to deal with life's little (and big) emergencies, chances are you will add to your debt. You'll never climb out of the pit of financial insecurity if you don't build an emergency fund. Keep in mind that this is only a starter emergency fund and you will need to save even more money after you become debt free.

Now for the prepping aspect of Baby Step #1. Having cash on hand is essential for preparedness. Consider this:
  • During the Great Depression, FDR declared a bank holiday. All banks throughout the country were closed for several days. If that was to happen today, you would definitely want to have cash at your fingertips.
  • If the grid goes down in a short or long-term emergency, cash or barter will be the only way you can buy goods. ATMs won't work and neither will your debit or credit cards.
I do keep the bulk of my emergency fund in the bank, but I am starting to keep a stash of cash at home. Some of it will be in our BOBs and in our vehicle kits. The rest of it will be kept in a fireproof safe hidden in my home. You should make sure that the bulk of your cash is in small denominations unless you relish the prospect of paying for a $7 pack of batteries with a $50 bill! There may not be change available when you need to use your cash in an emergency.

In his book, The Total Money Makeover, Dave relates the story of one of his listeners who put her $1,000 emergency fund in a cheap glass picture frame. She wrote "Break in case of emergency" on the paper she displayed in the frame. The frame was then hung on the wall behind the coats in her coat closet.

Many survivalists and preppers think that precious metals are an emergency fund essential. That is not a priority for me at all. I have way too many other things I need to spend my prepping money on at the moment and I'm not sure gold will end up being a quality investment outside of preparedness over the long haul. Read more about why you may or may not need to buy gold here. Dave Ramsey doesn't think gold is a great investment, but then again he thought I was a nut for storing food.

Saving money for an emergency is key, whether that emergency is TEOTWAWKI or simply everyday life.

Read much more about the Baby Steps in The Total Money Makeover. You may also be able to listen to Dave on his syndicated radio show. Dave's the man!

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