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An Emergency Fund Is Essential Business


2021 Financial Reset

January 10, 2021

An Emergency Fund Is Essential Business

There are a lot of lessons we learned in 2020, among others, that we can reinvent ourselves, you can never have enough toilet paper, and you should always tell those you care about that you care about them, every day. But what did we learn about our preparedness for a financial emergency? An emergency fund is essential.

Emergency funds create a financial buffer so you do not have to rely on credit cards or high-interest loans. It can be especially important to have an emergency fund if you have debt, because it can help you avoid borrowing more. But how much should you save?

If starting small, try to set aside at least $500, but work your way up to half a year's worth of expenses. The truth is the right amount for you depends on your financial circumstances, but a good rule of thumb is to have enough to cover three to six months' worth of living expenses. If you do lose your job, you could use the money to pay for necessities while you find a new one, or the funds could supplement your unemployment benefits. Saving this amount might seem daunting but no matter how much you determine you need, just start saving.

But where should you stash your funds? A savings account with a high interest rate and easy access is a good option because an emergency can strike at any time, so having quick access is crucial. Keep this account separate from the bank account you use daily to avoid dipping into your reserves.

What are some easy ways to build the emergency fund?

Set a monthly savings goal.

This will get you into the habit of saving regularly and will make the task less daunting. One way to do this is by automatically transferring funds to your savings account each time you get paid. If your employer offers direct deposit, there is a good chance they can divide your paycheck between multiple checking and savings accounts so that your monthly savings goal is taken care of without touching your checking account.

Keep the change.

Use mobile technology to automatically save each time you make a purchase. There are savings-focused apps that link with checking or other spending accounts to round up the purchase amounts on your transactions. The extra amount is automatically transferred to a savings account. If you usually spend cash, you can take your spare change, or maybe $1 and $5 bills after breaking a $20 and drop some in a jar at home. When the jar fills up take it to the bank and deposit the cash.

Save your tax refund.

Once a year - and only if you expect a refund - you can bank the return. Saving it can be an easy way to boost your emergency stash. When you file your taxes, consider having your refund deposited directly into your emergency account. You can also adjust your W-4 tax form so that you have less money withheld. Then direct the extra cash into your emergency fund.

Assess and adjust contributions.

Check in after a few months to see how much you are saving and adjust as needed. On the other hand, if you have saved up enough to cover six months of expenses and have extra cash, you might consider investing the additional funds instead.

We learned in 2020 that everyone on the planet can be affected by one turn of events. Having something in financial reserve can mean the difference between weathering a short-term financial storm or perhaps going deeper into debt. To analyze your particular situation and determine how much you should save for the unexpected, contact your Private CFO®.

If you would like to receive more information on making smart money moves for your future, be sure to contact us today!


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