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®.
