FOR EMERGENCIES ONLY: You Need To Create A Cash Cushion

Emergency, tordado, damaged house

This post originally appeared at The Motley Fool.Emergencies happen. You might as well plan for them. Whether it’s a temporary job loss or an unexpectedly high orthodontist bill, having some cash on hand will cushion the financial blow.

Creating a cash cushion for planned expenses is a good idea, too. So to help you on the path toward financial stability, follow this four-step plan, and start saving!

1. Consider your risk and responsibility. 
Do you have extra mouths to feed or preschool tuitions to pay? Is your job stable, or is your industry going through a hiring lull? Your answers will help determine how thick your cash cushion needs to be.

2. Figure out your essential expenses.
You’ve probably heard that you should have three to six months of expenses set aside for an emergency. That rule of thumb is a good starting point for your calculations, but you might need less than that — or more. It’ll take just 10 minutes to come up with your exact emergency savings amount. Use the PDF-format “Set Two Savings Goals” worksheet for this step and the next one.

3. Calculate your short-term cash needs. 
Your cash cushion also includes money you’ll need for expenses coming up in the next three, five, or seven years, depending on your risk tolerance. (You don’t want this money in thestock market. Trust us. Stocks are too volatile to risk your short-term cash.) The “Set Two Savings Goals” worksheet will also help you assess your upcoming cash needs and come up with a monthly savings amount to meet them.

4. Get the best return on your emergency savings. 
Mingling your emergency and short-term savings with your checking account puts your savings at risk. Instead, keep this money separate — and get a better return on your cash while you’re at it. The “Put Your Short-Term Savings to Work” worksheet (also in PDF format) will organise your savings-account shopping — taking into account liquidityinterest rates, risk, and account costs — so you can find the best return for your bucks.

For more on padding your cash cushion and preparing for life’s curveballs, see:

  • Where to Park Your Cash
  • Disaster-Proof Your Finances
  • Financial “Uh-Oh”? No Problem.

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This story was originally published by The Motley Fool.