Your fridge doesn’t freeze, your car doesn’t run, you don’t suddenly work. It can be difficult to manage a single costly event, let alone several at once. Yet things like this happen every day. Life can be difficult, but much easier if you have a reserve of cash to cover unforeseen expenses.
“Emergency funds are extremely important because they prevent people from getting into debt on their credit cards or withdrawing money from their retirement accounts to pay for things, which can be devastating to your finances,” explains Matt Stephens, a Certified Financial Planner (CFP) at AdvicePoint LLC in Wilmington, NC.
During what he called “the year everything broke”, one of his clients had to repair or replace his lawn mower, irrigation system, garage door, washing machine. , its garbage disposal, microwave and refrigerator. The client’s wife also underwent major surgery, with personal expenses of over $ 10,000. “Fortunately, they had a fully funded emergency fund, so they were annoyed, but not devastated.”
“It’s not about whether something will go wrong, but when,” said Thomas Scanlon, CFP at Raymond James in Manchester, Connecticut. “But if you know you have money in the bank, you won’t be up all night worrying.”
Lessons from the pandemic
The effects of COVID-19, fires in the west and hurricanes in the east have further underscored the need for a cash reserve. According to a June 2020 US Census Bureau survey, most adults who received a stimulus check from the federal government say they have used it, or intend to use most of it, for basic household expenses. household items such as food, rent, mortgage payments and utilities.
Plus, an emergency fund can help people stay the course when markets fall sharply, as they did in the spring of 2020, says Bradley Lineberger, CFP at Seaside Wealth Management in Carlsbad, Calif.: âAu Instead of selling your wonderful investments at rock-bottom prices during bear markets, you can tap into your reserves to get by. You can let your equity investments pick up and continue to grow.
Yet, according to a Bankrate.com poll released in July, only 44% of Americans have enough savings to cover three months or more of expenses. Additionally, 25% say they have no emergency fund at all, up from 21% in 2020. And 51% of people polled by Personal Capital, a financial website, say having a rainy day fund is a big deal. higher priority than it was before the pandemic.
Yet with multiple demands on your income, you might be wondering how to create a cushion or add to the one you have. Good question. The AARP asked financial planners across the country for their tips and best advice on raising money.
1. How much do you need?
If your job offers a stable and consistent salary, “six months of living expenses may be enough for an emergency fund,” says Ashley Folkes, CFP at Bridgeworth “Wealth Management in Birmingham, Alabama. “If your salary fluctuates, we recommend nine months.”
It’s the worst-case scenario: you’ve lost your job and have to rely on your savings to pay for basic expenses. In some cases, a smaller fund will do. Mark Ziety, CFP at WisMed Financial in Madison, Wisconsin, says the size of the fund should also be determined by the potential for an emergency. For example, a retired couple renting an apartment in a retirement community has social security and retirement income. They will not have any job losses or home repairs. âHealth care expenses may be their biggest financial concern, so an emergency fund that covers their potential costs may be sufficient,â he says.
2. Start with direct deposits, adding “money found”
Don’t you have that much cash? âDon’t worry,â Scanlon said. “Slowly add to this fund over time.” Set a reasonable goal first, maybe $ 1,000, that would cover a wide range of expensive but annoying emergencies – new tires, a dishwasher, some health insurance costs. Create a separate savings account and start making direct and regular deposits, however small. Add in the overtime, bonuses, and tax refunds you receive, suggests Scanlon.
3. Cut expenses, reduce debts, find a side job
Then rework your budget and reduce your bills as much as possible. Use cash, not credit, and pay off your credit cards. Take a list to the grocery store to avoid impulse buying, and cook at home rather than eating out. Cancel subscriptions and automatic purchases you don’t need. Lower your cable bill by cutting back on premium channels and switching to free TV and movie deals. Find a side job that you will enjoy. Folkes also suggests looking for things to sell. âIf you’re like me, you accumulate a lot. The internet has made selling easy and you can use the proceeds to build your fund. Â»Use the many applications available for this purpose.