Life is like a rollercoaster. There can be incredible highs and not so great lows. Well, your financial life is much the same. You can limit the down periods by planning ahead.
In general, people are optimistic about life. This is certainly a better way to approach it than being cynical. That being said, blind optimism can really lead to problems when you hit a bump in the road. As you probably know by now, there are definitely bumps on the road to life. A couple potholes as well!
To survive the inevitable bumps in life, it helps to plan ahead. In this case, we are talking about setting up a financial reserve. There will be rain days and your reserve will act like the proverbial umbrella. Not to be grim, but things that can happen can include the loss of a job and unexpected medical bills. On a less grim note, you might run into a situation where the reliable family car suddenly is not so reliable and a replacement is needed. All of these and other events can quickly put you in financial straights. By doing a little planning, you can minimize the pain.
Every person should have a financial reserve set up. Money doesn’t grow on trees, but you can grow a nice financial buffer with a minimum of pain. I am not talking about saving hundreds of thousands of dollars. Instead, you should be considering having the ability to cover your immediate costs. After all, how long would you last financially if you lost your job today?
When setting up an emergency reserve, there are some basic guidelines to follow. The first is you should have enough money set aside to cover all your living expenses for the next three months. This approach sounds prudent and logical, but three months is really not a long time.
A better guideline is to have at least six months to a year worth of living expenses set aside. If you lose a job, for instance, you have plenty of time to not only find a new one, but consider whether you want to continue doing the same thing. Ah, but saving a years worth of expense can be more than a small number. True, but there is one handy way to do it that will also benefit you in the long run.
The Roth IRA is a retirement vehicle that has become very popular. You contribute after tax money to it and the gains in the investments accumulate over time. The selling point of the Roth is that you can eventually withdraw the money tax free when you reach retirement. A more pertinent fact to our discussion here is that you can also use it as an emergency reserve account.
A withdraw from a retirement vehicle before you reach 591/2 usually incurs penalties. There is an exception with Roth IRAs. So long as you are only withdrawing the amount you have contributed to the Roth, not the earnings from investments, there is no tax. NONE!
Think about that for a minute. You can start stuffing money into a Roth and use it as your emergency reserve. If you are lucky enough to avoid a bump on the road of life, you will still benefit by having your money grow over the years. When it comes time to retire, you can pull the money out tax free and truly enjoy life.