The Best New Year’s Resolution: Restocking Your Emergency Fund

The Best New Year’s Resolution: Restocking Your Emergency Fund

Doug Harbaugh, CRPC®, Wealth Advisor

While everyone’s financial situation is unique to their individual needs and goals, there is one universal imperative for a healthy financial life: Adequate emergency savings.

During the coronavirus pandemic, 40 to 50 million people have applied for unemployment. These trying times have revealed the dire consequences of having inadequate emergency savings. According to a recent study by the Federal Reserve, approximately four in 10 adults in our country do not have enough cash on hand to cover a $400 unexpected emergency expense.

If you’re looking to increase your financial preparedness, here a few simple steps you can take today:

1. Decide how long your stockpile should last: An emergency fund is a separate savings account earmarked for unexpected expenses. While we can’t anticipate a job loss, sudden illness or home repair, having emergency savings on hand can help ensure financial stability when these events do inevitably arise. The rule of thumb for an emergency fund is at least three to six months’ worth of expenses in cash. Given the current environment, we have been recommending six months or more. A financial advisor can help you decide what makes the most sense for you.
2. Calculate your short-term savings goal: Understand the difference between needs and wants. List out all of your fixed expenses (needs). Fixed expenses include your necessary expenditures for the month, everything you can’t live without – mortgage, rent, utilities, food, student loan payments, car insurance, etc. Once you have calculated the cost of your monthly fixed expenses, multiply that number by six and that is your target emergency savings goal for six months of your expenses.
3. Evaluate how much you can afford to save each month: Set up an easily accessible savings or money market account specifically for your emergency fund. Take a hard look at your budget. How much can you afford to contribute to your short-term savings each month? You may have to cut back on your retirement plan contributions for a few months until you reach your emergency savings goal, and that’s OK. Once you have achieved your goal, you can readjust.
4. Speak with a financial advisor: If you need to shift your investment priorities to build up your emergency fund, a financial advisor can help you find the most tax-efficient investment strategies that make sense for you. It may also be helpful to consult a financial professional before tapping into your emergency funds. If you do dip into these savings, begin rebuilding your reserve as soon as possible.

Having emergency savings is absolutely critical regardless of whether we have a rollercoaster of a year like 2020, or hopefully a more uneventful year. The reality is, water heaters are going to break and accidents may happen unexpectedly. Being prepared financially can give you peace of mind and enhance your economic security. For more help on efficiently building your emergency savings fund, please feel free to give me a call at 216.800.9000.