Many people have heard or read something about establishing an emergency fund – especially in the last few years.

However, having an emergency fund is only one step in preparing for a financial hardship. It is also important to have a contingency plan in place when these financial hardships strike.

Why is it important to prepare for financial hardship?

Just like those who live in a flood-prone area need to have a plan for surviving a flood (knowing evacuation routes, having food, clean drinking water, supplies, etc), those who are prone to financial disasters (anyone with less than net worth of $1 Billion ) need to be prepared as well.

Also, building up an emergency fund can take time, especially if you are just getting started. However, developing a financial contingency plan is something that everyone from every walk of life can do today.

Even if you have an emergency fund in place, an unexpected event can leave you in a very undesirable position. You must be able to adjust your lifestyle in order to be successful in the middle of financial hardship!

What expenses can I cut?

This is probably the first and easiest step in developing your contingency plan. Evaluate your expenses and determine which ones you could easily cut if necessary.

Do you really need to have 100 cable channels? The expensive cell phone plan? A week long vacation every summer?

I’m sure we can go on and on about what unnecessary expenses you can cut, and everyone’s list would be different; but the main point is that you have to think of these things before the emergency hits. Talk this over with all the members of your household and see what current expenses you all could do without.

Deciding these things beforehand will be much easier, since financial hardships tend to stir up strong emotions and make it hard to focus on the task at hand. Avoid the stress, the arguments, and the finger-pointing by making the tough decisions now, before the emergency strikes!

Do I have anything I can sell?

On top of looking at what expenses you can cut, you should also look at items that you can sell. Many of us have items that are of some value to us and others, but we can live without them.

For instance, do you have a fancy lawnmower? Sell the fancy one, and buy a simple, used mower. This may not be ideal, but neither is being in the middle of a financial disaster with a fancy lawnmower, yet not enough money to make another mortgage payment!

Maybe you can sell your car and find alternative means of travel – or buy a cheap, used car and use the profits to help you survive the financial emergency.

If the emergency lasts long enough, or the financial disaster is large enough, consider selling your home and renting. Of course this only works if your house can sell for more than you owe (not the case for many who purchased within the last 5 years)!

Look at everything that you own, and decide what you can sell now. This is another tough decision that should be made before the emergency comes.

Do I have any debt that I can refinance?

If you can’t sell your home, then refinancing may be the next best thing. Just make sure that the terms of the loan will actually reduce your payments. This mortgage refinance calculator is a great tool to help you make this decision.

Student loan consolidation can also be a very helpful solution. Since the average student walks away from college with thousands of dollars in student loan debt, it’s safe to assume that if you are reading this, you have a student loan. Refinancing or consolidating this debt can save you hundreds of dollars each month!

Don’t forget to check to see if any of your credit cards offer low-interest balance transfers. This may help to free up some money in the short run and give you more flexibility during an emergency. Of course, you have to be sure that the interest saved is more than the fee charged for this service.

If you have a car or personal loan, be sure to see if you are in a position to refinance these as well. Although not as common as the options listed above, while preparing for a financial disaster, you should look into all options!

Can I earn extra money?

Earning extra money is an option that often gets overlooked. However, it can be the key to surviving a financial emergency. Don’t be afraid to look into jobs as a consultant, stocking shelves, delivering pizzas, or any other job you can get quickly!

Are there things that you love doing that you only consider a hobby? Well, turn your hobby into a business and fight your way through hard times doing what you love! If the hardship is more than temporary, you may risk falling out of love with your hobby – but then again, disaster planning may call for a few risks!

If you begin to look around your neighborhood now, you can determine what opportunities may open up for you when you need it. This is especially true when you need several hundred bucks or more each month just to make ends meet.

It doesn’t have to be as hard as looking for a second job. Try to get some overtime at work, or work toward earning a raise or bonus. Of course, if you do that now and save the difference, you’ll be in much better shape when disaster strikes!

Am I currently throwing away money?

Many of us are not taking full advantage of our situations in order to bring in more money. I’m not talking about getting a second job, or turning your hobby into income like above. There are various ways that we could earn or save money that we don’t take part in (such as establishing a Flexible Spending Account).

Read about 6 ways to find free money that can really have an impact on our current financial situation.

That sounds like a lot of options!

Yes, it does. Wait, that wasn’t a question!

Anyway, the major point that I want you to remember is to start planning for financial hardship today. Call a family meeting and discuss these points, create a financial contingency plan, and face the next emergency with confidence!

Why wait?

Ok, so my question to you now is…why wait? If you have followed these points you have now discovered expenses that you can do without, items that you can sell and still survive, debt that you can refinance and/or consolidate, ways to earn extra income, and ideas for finding free money!

If your financial situation is anything less than perfect, then implement these actions today! I mean it! What are you waiting for?

This is how you can avoid having so many financial disasters!

Reader Questions:

Do you have a financial contingency plan?

What costs will you cut?

Have you found any ways to earn extra income?

Have you decided to implement these steps before the emergency?

Do you have any tips to share?

When it comes to earning interest from cash products, Certificate of Deposits or CDs, are often considered a good choice. However, most CD interest rates are not offering terribly high yields right now.

It’s just the nature of any cash product.

You exchange safety for the potential for higher yields. It is possible, though, to boost your CD interest rates.

There are some high yield CD options that can help you get a little more bang for your buck, let’s take a look at a few of them:

High Yield CDs

These are your basic CDs, but with higher yields.

These CDs are most often found at online banks, so you can head to the Internet to look for them. You can also try a local bank or credit union, since these institutions may be running special deals.

It is also possible to enjoy higher yields on CDs that you get for longer periods of time, or for higher amounts. A 5-year CD with $15,000 will earn a higher yield than a 3-year CD with $4,000. High yield CDs provide a little more in terms of return than you might find otherwise.

Callable CDs

These are interesting CDs that might offer you a higher CD interest rate, but at the cost of the bank being able to call the CD back within a certain period of time.

You are offered a higher rate, but the bank will have the option to take back the CD after a certain term.

Some banks will offer a very high rate on a 5-year CD, and guarantee it for six months, or even a year. But, after that initial call protection period is up, the institution can recall the CD.

You get your principal back, and any interest you have earned to that point, but your high yield goes away. Banks use callable CDs as a way to get you interested, and then take advantage of the market if interest rates drop.

They call in the CD, and then you have to get a new CD — one with a lower interest rate.

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Brokerage CDs

Brokers also sell CDs. They get large issue CDs from financial institutions, and then break them down into smaller pieces that can be sold to investors.

Financial planners and brokers can also help you shop around for higher CD interest rates. Brokerage CDs often come with higher yields than more traditional CDs.

However, you do have to be careful. In some cases, you might have to pay a fee as part of the transaction, or fees charged on assets under management may cut into your returns. You also have to check to make sure your CD is FDIC insured, since not all brokerage CDs are.

Another option related to brokerage CDs is the secondary market. It is possible to buy and sell CDs much as you would fixed income investments. However, you run the risk of losing money in these cases, and your CD is probably not insured.

Bump Up CDs

These interesting CDs offer the option of taking advantage of a higher interest rates later on. You have a fixed term for your CD rate, and if interest rates rise, you have the option of “bumping up” your CD rate to that higher rate when the current term ends.

Basically, you have the option of enjoying a higher CD rates on a new issue if you have a bump up. Since the bump up doesn’t take place until after the original CD’s term ends, you will need to choose quite carefully.

Bottom Line

There are CD products out there that offer higher interest rates. They still may not be the types of returns you can potentially get from stocks (or even bonds), but high yield CD options can help you get a little more for your cash.

Plus, with the right CD products, you can more effectively preserve your capital, and maybe even protect — at least a little bit — against inflation.

This has been a guest post by Nathan Richardson, Managing Editor and Founder of ComplexSearch, Nathan enjoys blogging and helping consumers save money.

Financial difficulties like recessions, job layoffs or reduced salaries have a way of revealing how important it is to build a financial safety net.

Having funds available for emergencies helps weather the inevitable storms of life and can get you through some difficult circumstances without incurring credit card debt.

Here are some things to consider when establishing your emergency fund.

How much is enough?

Generally speaking, most financial advisors will recommend you have at least three to six months worth of expenses in a cash reserve.

Depending on your situation you may want more.  For example, if you have a commission-only job and your income fluctuates or you have a seasonal job where your income is low for a few months out of the year it might be wise for you to establish a larger net.

How do I begin establishing a cash reserve?

If you find your reserves are a little anemic, consider these steps to start the process:

1. Take inventory of your monthly expenses.  Multiply this number by your desired reserve (i.e. 3 months, 6 months etc)
2. Make a budget so you can begin to “trim the fat”.  Cutting back on unnecessary expenses will free up extra cash that can be saved into your reserve.
3. Get creative on making additional money.  Sell your old “junk” on ebay, or have a garage sale.  Use these proceeds to start building your emergency fund.  My wife and I have made some extra money these last few years by selling our old cell phones, clothes and more on ebay.
4. Save aggressively into a savings account.  There are many great accounts out there.  Bob at ChristianPF has a post on the 10 reasons why he loves ING.  If you like using local banks, I suggest calling around to find out who is offering the highest interest.  Otherwise if you are comfortable with online banking then check out bankrate.com.  They allow you to search the highest yields at banks both locally and nationally.
5. Don’t dip into your reserve unless absolutely necessary.  One of the biggest mistakes people make in setting up cash reserves is a false sense of now “having money to spend”.  Stay focused on the task at hand.  After you’ve built up your cash reserve feel free to reward yourself.  Just remember this money is for a safety net.

I built up my cash reserves – now what?

Once you’ve reached your goal for your cash reserve it’s time to get strategic about earning the most interest.

I usually recommend a Three Tier Cash Reserve System to help keep the funds liquid and yet earn a higher rate of return.

A three tier cash reserve basically utilizes a checking account, a money market and a short term CD Ladder.

Tier 1

Tier 1 consists of your checking account.  It acts as your revolving door, meaning  funds come in and go out on a regular basis.

Since most checking accounts pay nothing, you want to keep no more than one months worth of expenses here.

Tier 2

A money market fund is designed to provide a safe place to invest short term liquid assets.  They typically generate a higher interest rate than a savings account.

If you are using a three month reserve you’ll want to keep about a months worth of expenses here and about two to three months worth if using a six month reserve.

Tier 3

A short term CD Ladder is essentially a 12-month CD bought each quarter or four total.  Divide the remaining amount of your reserve by four and buy a 12-month CD.  In three months do the same thing and so on.  Remember to always look around the best best CD Rates before you make any final decision.

If you fast forward one year from now, you will have a CD coming due every three months in case of a major emergency and need to access the funds.

Theses ladders can be structured in various ways.  For example, you could buy a 3, 6, 9, & 12-month CD all at once if your bank offers those terms.  You could also buy 12, 24, & 36-month CDs to ladder your funds.  I am a big fan of the 12-month CDs for two reasons:

1. They typically offer higher interest than the shorter term CDs
2. You don’t have to lock up your money for a longer time period.  Since this is a saftey net, you don’t want to be in a position where you are cashing out a longer-term CD early and incurring a penalty or forgoing interest.

Set Targets and Avoid Discouragment

Don’t be discouraged if you are not able to get your cash reserve set up like this yet.  The key is to stay focused on saving your money so that you can get your emergency fund where it needs to be.

Set a target for yourself of when you’d like to achieve this goal and also set little goals along the way (i.e. saving your first $1,000, getting Tier 2 set up etc.).

Be sure to reward yourself along the way when your goals are met so that you can stay motivated and positive.

Saving for Emergencies or Paying Down Debt

Inevitably a question will come up from time to time about whether it is smarter to save into an emergency fund or pay down credit card debt?

I like Dave Ramsey’s “Baby Steps” idea when faced with a question like this.  What he usually recommends is that you save $1,000 into an emergency fund first and then start paying down your debt.

You can worry about building up your Three-Tier Cash Reserve once you have your debt wiped out.

Resources To Help

• Bankrate.com - compare interest rates on savings, money markets and CDs from banks across the nation.
• Dave Ramsey’s Baby Steps