Unlocking the Mystery Behind Saving for Emergencies
One of the essential steps in creating a life of financial stability is to create an emergency fund. There is nothing fun or exciting about emergency savings; it’s like insurance – boring, but necessary. You can think of your emergency savings like insurance for living your life.
What is an Emergency Fund?
An emergency fund is a cash buffer that is available to help you pay for any unexpected expenses that might pop up through the course of everyday living. It’s good to sit down and brainstorm that these kinds of costs might be. If your A/C unit goes out in the middle of July when it’s 103 degrees outside, how will you pay for an immediate repair or replacement? Hopefully, you have an emergency fund set up that can handle this expense, so you don’t have to turn to credit cards to get you by. It makes sense first to understand exactly what your emergency fund could be used for before mapping out a plan to start building one. Here are some examples of what expenses should be covered from an emergency fund.
Unexpected car repairs – These expenses can typically cost hundreds of dollars to fix. These expenses are also ones that must be taken care of right away to have a reliable mode of transportation.
Unexpected home repairs – Homeowner’s insurance could cover most significant expenses, but you should understand what is covered and who much you would have to pay out of pocket to reach your deductible. Keep in mind if your refrigerator goes out, these are not typical expenses that would be covered under insurance, and that must come out of your pocket!
Health expenses – It’s important to know what your payment obligation will be for any medical treatment. If you have a high deductible health plan of you have a very high out of pocket limit, it would be wise to have some cash liquid that would cover these expenses. Of course, I always recommend saving through an HSA (Health Savings Account) if you have that option available to you.
Income replacement due to job loss – If you lost your job tomorrow how would you pay the mortgage? It’s a good idea to have an emergency fund to cover your necessary living expenses for at least three months should anything happen to your steady paycheck.
Bigger than expected tax bill – April 15th comes a lot faster than some of us realize. If you wait too long to get your tax information together, it could come as a surprise that you have to pay Uncle Sam a larger than expected sum of money without a lot of notice. If you have an emergency fund available, you could potentially ease a lot of stress when it comes to writing that big check to IRS.
Unexpected travel expenses – An example of this type of expense would come from an excepted trip out of town to care for a loved one or attend a funeral. I know all too well how devastating this can be emotionally, and the last thing you need to do is stress about the cost of a last-minute plane ticket.
Emergency pet care – For most of us, our pets are part of our immediate family. Many people don’t carry pet insurance, so having cash on hand to pay for emergency medical care for your pet is just as important as having the money to pay for your own emergency health needs.
How Much is Enough?
This is the question that stumps people most when it comes to the topic of an emergency fund. It can seem overwhelming to think about accumulating large masses of money to have for “just in case” purposes. While most people understand the importance of saving for an emergency, they also want to use their money for things they enjoy. Building and emergency funds should be an ongoing financial obligation. It can be hard to quantify just how much you’ll need for emergencies since everyone's situation is unique. The typical rule of thumb is 3 – 6 months of non-discretionary living expenses. Only your monthly bills, along with debt payments, should be included in this calculation. If you’re having trouble coming up with the appropriate figure, I can quickly help you identify your emergency fund savings target and come up with a strategy to help you get there. If you’d like a quick reference calculation check out this easy to use online calculator!
Optimizing Your Emergency Savings
Your emergency savings should be liquid and available to you when you need it. I believe the best place to stash your emergency cash is by opening an online savings account paying a competitive interest rate. Most online savings accounts can offer a significant improvement over the national average on their interest rates while still providing easy access to your funds. Some of our favorites include Ally Bank, Discover Bank, Marcus and Capital One. The process is easy, and the accounts are open in seconds. Hopefully, you don’t need to use your emergency funds regularly and they can continue to build from the monthly accrued interest.
Please reach out if you need help to figure out how to split up your income each month to allocate money towards these financial priorities. It will be different for each individual since we all have unique lifestyles, income and family situations. You can contact me at 913-871-7980 or by email to discuss your financial planning and investment management needs.
BRANDY BRANSTETTER, CFP®
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.