Saving for an Emergency Fund Healthy:: Simple steps to make sure you have money
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Do I Really Need to Be Saving for an Emergency Fund?
Saving for an emergency fund is important
for safeguarding your family's financial future when an emergency occurs,
what happens if you haven't saved some money in advance?
Should you use all your money to pay down
debts, or should something be set aside for a rainy day?
With the COVID-19 pandemic, we have learned that you never know when
and how you might be affected by a health issue.
There are times when people need to tap
into their rainy day fund because of a financial emergency.
There are always unexpected expenses.
The idea of emergency savings is easy to understand.
Rainy day funds, what are they and how do they work?
In this Brandon Blog, I explain the importance of having
an emergency fund and how you should go about saving for an emergency fund.
What are examples of emergency expenses?
Emergency savings are intended for emergencies.
As its name implies, life is full of unexpected events,
breakdown of the car or repairs because of that Fender Bender.
There's a problem with the fridge. In a recession or when the economy shuts
down, you lose your job with the resulting loss of income.
As we have seen emergency medical expenses.
In the absence of emergency fund money
to cover such expenses, you could end up paying your bills
with a credit card, relying on payday loans,
or heavily utilizing your secured or unsecured line of credit.
These are very expensive ways to meet your urgent expenses.
Saving for an emergency fund so that you
have funds on hand is a much better strategy.
How Do I Start Saving for an Emergency Fund?
Planning your personal finances begins
with a monthly budget to be able to track monthly income and monthly expenses.
It can be as simple as looking at your
bank accounts and credit card statements to get a handle on what your monthly
income and expenses are in writing it down on a piece of paper.
Or you can get fancier and use electronic
budgeting worksheets, budget apps, or an online budget calculator.
You should follow three main steps when
building an emergency fund. Keep a daily record of your household
expenses and categorize them as discretionary or non-discretionary.
Take an average of all your expenses over
several months to get a feel for a true average monthly amount.
In addition to taking stock of your
expenses, this exercise should be used to weed out all unnecessary expenditures.
You can begin to save money by redirecting those unnecessary expenses into savings.
An emergency can last for any number
of months, so plan ahead by setting aside enough money to last at least six months.
Individuals, couples, or families have different requirements.
Is it a single income family or a double income family?
The length of time it takes to save
an emergency fund as well as the amount needed, will be determined by this.
How much Savings Should I have when saving for an emergency Fund?
There are some rules of thumb
that a financial expert would recommend when deciding how to go about creating
financial plans and saving for an emergency fund.
You can use the six months of expenses calculated in your current budget as
a general rule of thumb to set up a six month emergency fund.
A six month benchmark for emergency funds
is a good place to start, but it's not foolproof.
COVID-19 has shown that even a six months
emergency fund cannot cover your household expenses
if your income is dropped for an extended period of time.
Depending on your financial goals, this can be extended.
Harvard University found that 46%
of households in the United States that lost their jobs as a result
of the pandemic spent all or most of their emergency savings.
If you are saving for an emergency fund, consider things like your household's
number of people, income of the household members, the minimum amount needed
to cover your monthly household expenses, and how stable is each income source is.
And is there any additional income source that can be created
or you may have just not thought about,
such as a side gig to create business income or income tax refunds.
Ideally, your emergency fund should be
proportionate to your earning potential and reflect how much you can save.
It should also represent an amount that feels comfortable for you.
A very important thing not to overlook is
that you need to consider your income on and after tax basis, not gross,
so that you have accounted for paying your income tax on time.
Five Normal Questions About Saving
for an Emergency Fund During the COVID-19 Pandemic. Two of the five
questions we have already dealt with: how do I start saving for an emergency fund
and how much savings should I have when saving for an emergency fund?
The next three standard questions
and answers I list below. Where is the best place to put your emergency fund?
An emergency fund serves as a safeguard.
When you are faced with a true emergency,
you will feel more at ease if you can fund your expenses from your emergency account.
In case of unforeseen circumstances,
make sure the emergency fund is separate from the other accounts.
Keeping your emergency fund liquid is essential.
Avoid investments that require a longterm commitment.
I recommend that you keep a certain
portion liquid in an interest bearing savings account.
Is there such a thing any more as a highyield savings account?
Right now, interest rates are low, but something is better than nothing.
As I already stated, keep it separate from your other funds
to be able to automatically save without thinking about it.
Set up an automatic payment each pay period from your checking account
into this saving for an emergency Fund savings account.
Finally, put the balance of your emergency
funds into a shortterm GIC that can be cachable on demand.
That way, it will earn something but is also liquid if needed.
I have a line of Credit Should I still be saving for an emergency fund?
Keeping an emergency fund is always a good idea.
As mentioned above,
it's good to have a line of credit, especially if it has a low interest rate.
However, I wouldn't use it as my first line of defense.
If you don't have enough money in your emergency fund to cover the immediate
needs, you can always use your line of credit to supplement your emergency fund.
In the event that you borrow to meet those
expenses, you should aim to repay the borrowed funds as soon as possible.
Should I use my emergency fund to pay off debt?
Should I pay down debt before saving for an emergency fund?
Yes, it is true for some people.
You might want to start paying down debt before saving for an emergency fund.
If you have a large amount of debt and no way to repay it when an emergency comes
up, however, you will have less money on hand if you do that.
Isn't it better to repay your debt before you start an emergency fund?
If you're in debt? Yes, the answer is yes.
It does not have to be done at once.
It is important to pay off the smallest balance first so that you can spend more
on essentials and cut back on unnecessary expenses.
This strategy only works if you are disciplined enough to stick with it.
It also depends on what kind of debt, high interest credit card or paid a loan.
Debt should definitely be paid down first.
As I previously wrote in a recent Brandon blog, those with a poor credit score have
been able to pay down massive amounts of their credit card debt.
However, in order to not run that credit
card statement backup, the next step should be saving for an emergency fund.
Saving for an emergency fund.
Summary I hope that you found this saving for an emergency fund.
Brandon blog informative Unexpected emergencies by their very nature are not
pleasant and could have the effect of adding significantly to your debt load.
There are several insolvency processes
available to a person or company with too much debt.
You may not need to file for bankruptcy.
If you are concerned because you or your business are dealing with substantial debt
challenges, you need debt help and you assume bankruptcy is your only option.
Call me.
It is not your fault that you remain in this way.
You have actually been only shown the old ways to try to deal with financial issues.
These old ways do not work anymore.
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Contact the Ira Smith Trustee & Receiver Inc. Group today.
Call us now for a no cost consultation.