Seems like all we’ve dealt with the past few years, economically speaking, is a series of *emergencies*.
Adjusting to this new normal, especially in terms of your checking account, and still maintaining a safety net for when unexpected costs arise, isn’t easy.
Hard as it is, it is necessary, and I think all my Orange County, California friends would agree on that after navigating the last three years together.
If those disruptions we’ve experienced have taught us anything, it’s to make a plan for the unexpected. Life is perpetually unpredictable. So, we’ve got to find a way to withstand those unpredictable moments and build some kind of financial security net to help us get through them.
I wouldn’t say this if I didn’t think it was doable, even in lean economic moments. You can save enough to have an emergency fund even when things are tight… and you should (with very few exceptions).
So, let’s discuss what that looks like…
Tom Bass’s Guide for Building an Emergency Fund
“My life has been a series of emergencies.” – Lana Turner
Please answer, “Completely,” “Somewhat,” or “Not at all”:
I can handle a major expense.
I’m just getting by financially.
Now let’s try “Always,” “Sometimes,” and “Never”:
Giving a gift for a wedding, birthday, or other occasion would put a strain on my finances for the month.
I have money left over at the end of the month.
My finances control my life.
How’d you do? If not-so-hot, don’t feel bad: One in three adults recently said that even a 400-dollar unexpected expense would be a real headache. But with recession and inflation always looming, your emergency fund is key.
Here’s how to build (or re-build) one.
Now’s the time
An emergency fund, as you might know, is a stash of cash that you can access quickly to cover your basics for a length of time: Six months has been the rule, but some money gurus say nine months or even longer is good.
Why? Because if the pandemic and worsening Mother Nature teach us anything, it’s that we all have to expect more of the unexpected now, from mass shutdowns to massive floods to skies orange with wildfire smoke. And the expected can easily interfere with our ability to pay bills – or, in the case of natural disasters, can give us massive new bills to pay in addition to stopping normal life.
Then there are the dollars and cents. We’ve been hammered with inflation for a while now – 9% or so just a year ago – but lately it’s been on the wane. You may have thought you’d be paying more for stuff now. Pay attention to that extra money and prepare for the future.
What’s an ‘emergency’?
These days we tend to think of everything as an emergency but everything, frankly, isn’t. Set guidelines for when to dip into your fund.
Suppose your car needs an emergency repair and you need that car to get to work. That’s an emergency. Suppose you have to go to your local Orange County, California urgent care and later you get a big bill. Is that expense an emergency? Sure sounds like one. Except that most hospitals will offer interest-free payment plans and even financial aid if your money’s tight (also make sure the bill was properly submitted to your insurance company, but that’s another tale …). Car mechanics won’t cut you such a break – yes you can put your car repair on a credit card, but that payment plan is definitely not interest-free.
So one guideline might be, What other ways are there for me to pay or lower this “emergency” expense?
Explore every detail of a debt, including all ways to mitigate it, before you declare it an emergency. When it meets all the guidelines, then dip into your fund.
Plan to save
Go back over the past three months’ steady, basic expenses: rent/mortgage, insurance, groceries, gas/transit. From that total, you can take a fair guess at how much you spend in three, six, nine, or 12 months.
Pick a number of months’ expenses that you realistically think you’ll be able to save for, too. Don’t jump at just three months necessarily, but you may not have to sock away enough for a full year, either. Keep in mind, though: The amount of time it takes you to save for your emergency fund will depend on your individual circumstances. If you are able to save for a full year of expenses, that is great. However, if you are unable to do so, don’t be discouraged. Every little bit helps.
An emergency fund’s like any other nest egg: useless unless you put money in it. And the best way to do that is regularly with amounts no matter how small. (Take a look at this savings plan for inspiration.) You want to put aside a specific amount of money each day, week, month, or payday period. Try for a set amount – but more is more. Track your progress.
(By the way, if you have a legal commitment to pay off a debt, maybe to the IRS or a creditor who’s threatened legal action, that amount is more important than your emergency fund. Address it first.)
Where to put money
When you need it you’ll need it fast. Your emergency fund should be liquid.
Your Orange County, California bank is the obvious choice, but the interest on liquid accounts stinks (even on money markets). You can get 4-5% with an online high-yield account (check out a few here) and bear in mind that these accounts didn’t exist not that long ago. They’re perfect for an emergency fund and you generally can get your withdrawal via a debit card, wire transfer, or, if you’ve got the time, a paper check.
If you’re old enough, your retirement account can also act like an emergency fund. Check with us.
The unexpected has a way of happening when you don’t see it coming. You can prepare yourself now and have one less thing to worry about.
And while financial advice is something you should confirm with a professional advisor and make sure it works for your particular situation (though an emergency fund is something any person would advise as wisdom), we are here to talk things through… but especially to help you think through them as they affect your tax situation. So, that emergency fund doesn’t need to be used for paying unexpected tax bills…
Get in touch with me here to talk about some tax-saving strategies you can implement now:
In your corner,
Tom Bass