Life is full of surprises, and sometimes those surprises can be expensive. With an adequate emergency fund, you can handle flooded basements and unplanned medical bills without derailing your financial goals. Maintaining an emergency fund can make a difficult time a bit easier. You might have a lot to handle when the unexpected strikes, but at least you won’t have to worry about how you’re going to pay your expenses. Not sure how to start and grow an emergency fund? Here are a few things to know.
FREQUENT QUESTIONS ABOUT DEVELOPING AN EMERGENCY FUND
WHO NEEDS AN EMERGENCY FUND?
Anyone who’s responsible for their own expenses should have a plan for financial emergencies. Creating an emergency fund is part of comprehensive financial planning. It might sound simple, but you (and your spouse/partner) should have one! If you’re just starting, this can be a great time to educate kids about saving for the unexpected. Teenagers with jobs can start allocating some money from each paycheck into an account that’s reserved for unforeseen expenses. You can also have conversations with adult children about keeping emergency funds. While it might seem unpleasant to discuss, it’s much easier to have the conversation before an emergency actually occurs. Additionally, it means they will have financial security and independence in an emergency or if they lose their job.
Ideally, aging parents would maintain their own emergency funds too. Anyone who’s financially dependent on you should have one so you don’t have to use your own savings during their challenging times. But, that might not be possible for retirees living on a fixed income or young adult children living paycheck-to-paycheck. Building up your own emergency savings allows you to support your aging parents or other loved ones without diverting cash from your own budget.
HOW MUCH SHOULD I HAVE IN MY EMERGENCY FUND?
General wisdom says an emergency fund should cover three to six months of expenses. That might feel sufficient to you. Some people may want to save even more. Suppose you have an old house that constantly needs major repairs, or a parent who can’t always afford their own expenses. Keeping more than six months of expenses in your emergency fund could prove useful if you have these kinds of recurring financial pressures. Speak to your financial planning advisors for help determining a target goal for your emergency fund, depending on your risk tolerance and overall financial picture.
HOW SHOULD I FUND IT?
There are a few ways to build up an emergency fund. Many people use a gradual savings method, diverting a little bit of cash into the fund every month until it reaches the target goal. Or, you may prefer to make larger, less frequent contributions. Some people choose to allocate money from tax refunds, inheritances, the proceeds from selling property and so on to their emergency fund. The goal is to divert money into your emergency fund while maintaining your normal monthly spending habits.
Replenishing your emergency fund is another consideration. Let’s say you spend half your fund on unexpected medical bills. Afterward, will you move money from investments into the fund to cover what you spent? Or rebuild the fund little by little, month by month? It’s a personal decision; again, speak to your financial planning advisors for specific guidance.
WHERE SHOULD I KEEP MY EMERGENCY FUND?
Putting all of your emergency savings into stocks or other investments is generally inadvisable. Accessibility is one of the most important elements of a good emergency fund. If your basement floods, you need to be able to pay for the cleanup right away without having to cash out stocks and create new tax implications for yourself.
Alternatively, money market accounts and high-yield savings accounts are both good options as a container for emergency funds. Your wealth steadily grows through the power of compound interest. Then, if an emergency strikes, you’re able to withdraw however much you need from your account. After the emergency passes, don’t forget to strategize about how you’re going to rebuild your funds.
NEED HELP CREATING YOUR EMERGENCY FUND?
Sachetta’s financial planning advisors work closely with clients on every part of the financial planning process. We can help you analyze your situation to determine how much you should save in your emergency fund, and find the most tax-advantaged ways to fund it. Contact us today.
Setting aside funds for the unexpected can alleviate the financial strain that often comes with challenging times. In this article, Domenica Lurvey answers common questions regarding emergency funds.