It's easy to assume that disasters won't strike you, or to simply hope for the best should one hit. But disasters do happen to lots of people who are also not expecting them -- things like losing your job, having an expensive medical crisis, or even losing your spouse and his or her income.
You can cushion yourself from financial dire straits by having an emergency fund, stocked with at least a few months' worth of your non-negotiable living expenses (think food, rent, insurance payments, utilities, gas money, etc.). For those who want even more peace of mind, consider socking away as much as nine months' or a year's worth of living expenses. In fact, some experts argue that retirees might want to keep several years' worth of expenses at hand.
If you don't already have one, here are some tips to get your emergency fund started and well under way:
1. Keep your money safe, perhaps in a savings account, money market account, or short-term CD. Long-term CDs might offer higher interest rates these days, but they will charge penalties if you need to withdraw funds early. And the stock market is risky for money you might need to withdraw soon, as stocks can plunge at any time (though stock in healthy and growing companies is likely to eventually recover). That said, though, if you're willing to take on a little risk, you might keep six months' worth of emergency money in a safe place and keep the rest somewhere that will offer a little more growth.
2. Be creative in funding your emergency fund. You're not just stuck with whatever money is left from your paycheck at the end of your pay period. You might, for example, hold a garage sale. You could reduce or eliminate some discretionary expenses from your budget (meals out, club memberships). Also, you'd be surprised how much you can save annually by shopping around to find the best deal on larger expenses such as home insurance and car insurance.
3. Plan annuities carefully. Annuities can be terrific retirement income generators, but they do have a downside, in gobbling up a chunk of your nest egg that then becomes unavailable to you. Don't put all your money in annuities designed to cover your regular living expenses, lest some irregular expense crop up.
4. Be aware of other options. If financial disaster strikes and you need some quick money, consider tapping your IRA before you charge a big expense on credit cards that will levy hefty interest charges. Once you pass age 59½, you may be eligible to withdraw Roth IRA funds tax-free. Before that, you may be able to withdraw from your own contributions (but not investment earnings). Consider these as only extreme strategies. Since this money is likely vital to your retirement, don't borrow from your IRA unless you really need to.
5. Spread the word. If you're 50 or older, you've got some life experience and are probably looked up to by some of your loved ones. Do them a favor and advocate having an emergency fund. You might end up sparing them a lot of headache and financial stress. You might prevent them from having to come to you in a time of trouble, too, which would present you with a financial crisis.
We all need to be prepared for financial emergencies. Don't leave your fortune to fate -- protect yourself via an emergency fund.
You can follow Motley Fool contributor Selena Maranjian on Twitter @SelenaMaranjian.