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The ins and outs of emergency funds

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Ever had your car break down, been forced to do a major home renovation, or suddenly lost your job? If your answer is no, consider yourself super lucky. Unexpected things happen in life all the time. Planning ahead for the unexpected will make the stress of handling those emergencies easier to swallow. We’re talking emergency funds. While easy enough to understand, emergency funds can be tricky. You need to know how much to save, how best to save it, and when to turn to that money.

Let’s lay down some ground rules:

Rule #1: Set aside six months worth of income.

Don’t panic. You’re probably thinking “Six months! I don’t even have one month.”, and that’s okay. You’re not alone. According to recent data, only three out of every ten Americans have $1,000 socked away. The goal is to make sure you’re on the path to being one of those folks who does have emergency savings. To get started, decide on a reasonable amount of money to put aside each month.  Then, set up an automatic withdrawal from your checking account to your savings. We suggest setting the withdrawal for a day or two after your paycheck is deposited. This will lower the temptation to spend those earmarked funds. Start small, be consistent, and soon you’ll have that money ready and waiting when life throws you a curveball.

Rule #2: Everyone’s different. Take your personal situation into account.

Your personal financial situation dictates how you’ll be able to handle an emergency. How much money you need depends on where you stand in life. For example, if you own your business, you don’t need to worry about being fired. However, if you’re an employee in an industry that’s steadily becoming obsolete, losing your job is much more likely. What does this mean for your emergency funds? If you see the writing on the wall at your workplace, definitely make saving up a priority. Your monthly expenses matter too. If you have a lot of bills each month, you need to save a larger chunk in case of an emergency. If you live more frugally, that may not be as necessary. The best way to figure all this out is with a financial plan. A financial plan takes these types of variables into account, and shows you the big picture.

Rule #3: Use your emergency fund for…wait for it…emergencies!

Seems like a no-brainer, right? But the line between emergency and non-emergency can be pretty gray. It’s really hard not to spend money if you have extra to spare. As Americans, it’s ingrained in our minds that we need this or that, could use an upgrade on XYZ…the list goes on and on. Those tendencies are very real, which is why defining an emergency can help.

An emergency is a situation that meets both of these criteria:

  1. It has to be taken care of right now.
  2. It’s a necessity.

Here are a few examples. If you’re in a car accident, you may need to pay for medical bills (your health can’t wait), and get your car fixed (a necessity). That’s an emergency. If you have water pouring down your walls in your house, you have to get that taken care of immediately, and obviously your home is a necessity. Again, emergency. Other things that pop up, like giving your kitchen a facelift, buying a new car, or taking that dream vacay can wait, and aren’t absolutely must-dos. Hold off on those things until you’ve saved up enough separately.

 

Having an emergency fund makes unexpected life events a little less scary and a bit more manageable. Plan ahead, get in the habit of saving, and you’ll be good to go. Any other questions about emergency funds, or want to get started on your own financial plan? Give us a call!

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