It is that time of year when people typically spend more time thinking about spending than saving. However, for many of us, there is never a wrong time to take a few minutes to review what we have set aside in our Emergency Fund. When an unexpected expense arises, are you ready? Where do you pull the money from when the dog gets sick, the car breaks down, you have to make an unexpected trip somewhere? The list of unexpected expenses goes on and if you are not prepared for the unexpected the more extreme the situation, the more stressful this can be and the more strain this can put on your finances.
Let’s start with an easy question: do you have an emergency fund set up? Money set aside in an account that is only for those unexpected emergencies (and no I don’t mean the latte emergency). This should be an account that you do not have a debit card access to, not a credit account. This should be a cash account, preferably earning interest for you somewhere that is not tied up in any type of investment. These are funds you can access immediately if you need to.
Many financial experts recommend that you should have savings equal to six months of your salary. Whatever your monthly expenses are, multiply that by six and that’s what you should have. Others say you should have at least three months of savings. With that said, a 2017 survey from GOBankingRates.com, found that 57% of respondents said they had less than $1,000 in a savings account. Yes, that said LESS THAN $1000.
So now that we know we don’t have enough in our emergency fund, what do we do about that, or maybe where do we start? Let’s look at some examples:
If you want to get started, open a savings account preferably at a bank that pays a good rate of interest on their savings accounts. Having this account at a bank different from your main bank can make it easier to save, as the funds are not attached to your main account that you pay bills from. If you are trying to get started, then start simple. Set up auto draft either from your paycheck or from your account you pay bills from to start having funds deposited directly into your new savings account. If you would like to have $1000 by the end of three months (SEE OUR EMERGENCY SAVINGS CHALLENGE) then you will need to start depositing at least $84 per week for 12 weeks, or $167 every two weeks, or $334 per month.
Maybe you want to think BIGGER? If your monthly expenses are approximately $4000 per month. And you want to work on having at least three months’ worth set aside this year and six months set aside within the next 18 months, you can design your own plan to do this as well.
You can use this chart as an example of how to build a savings plan that fits your budget. How much do you want to save? How much can you afford to put aside from each paycheck? How often do you get paid?
1 year Target Savings Goal:
*This is just a sample and not intended to be the ideal guide for every situation.
When was the last time you looked at your budget and determined where all your income is going? How much disposable income do you have at the end of each month and what are you doing with it? There is no one right answer for everyone. What may work for your sibling, neighbor or co-worker may not be what works for you and your household. Are you a one wage earner family? Do you have multiple jobs? What is important to you?
When we sit down with our clients to talk about planning needs, including emergency savings, these are some of the questions we ask in order to help clients gain some perspective and control over their finances. There is nothing wrong with carving out part of your budget to do things that you enjoy. There is a difference though between carving out some of your budget and blowing your non-existent budget on a hobby.
There is also something to be said for having enough savings set aside to take advantage of an opportunity that comes up unexpectedly. When my grandchild is unexpectedly receiving an award and I want to be there to celebrate with my children and grandchildren in their success, an emergency account keeps me on budget so I do not have to rely on charging up my credit cards to take that unexpected trip. Or when that business opportunity pops up that I did not expect to happen for another several years, with funds in my emergency savings account I can pay cash rather than attempting to finance my new endeavor. There is something to be said for being self-reliant!
Whether you are just starting your fund or building your fund. Determine the right amount for you and your household and work toward that goal. We are starting a new challenge in December for anyone who wants to save along with us. Set up your savings plan and in March we will be checking in to see how everyone did. Share your story with us and others. Let us know you are saving with us on our Facebook page and we will see you at our Savings Challenge Celebration in March!
Contributed by: Karen Ness