Due to the economy being on a current downturn, many families have had to tap into their emergency funds for everyday living expenses. The problem is that most of the people out there either don’t have any reserves or don’t have enough to cover a major reduction in income.
Suze Orman recommends to have eight months of reserves set aside for problems that might occur like a medical emergency, job loss, or other major expense. Since the pandemic, she’s now advocating for a full year of reserves. This means that you take the amount it costs you to pay all of your expenses in one month and multiply that number by eight (or 12). It may seem like an extremely high number, but you can get there with time and diligence. By using all of the tactics in this blog (and Facebook page), you will be spending less and be able to save more money than you ever did before.
Per www.grow.acorns.com, with the current Covid crisis, it’s more important than ever to have money set aside for unexpected expenses. Nearly 50% of respondents said they’d run through their emergency savings according to Highland Solutions. And even more disheartening is that over 80% weren’t able to cover an unexpected $500 expense. Can you?
In the survey, 63% of adults said they’d been living paycheck to paycheck for almost a year with 53% saying that it was not that way prior to the pandemic. Showing the utmost importance of having an emergency fund prior to having the emergency occur.
We all know that we should have reserves along with zero credit card debt, but we also understand that the reality is that it may take many years to get there. And that doesn’t even include saving for college or retirement, a special trip or a car. I highly recommend that you work on paying off debt at the same time you’re building up your reserve funds. This is what will eventually bring you out of debt and set you up for your financial future.
How Much Do You Need?
The average household has roughly $5,000/month in expenses (housing, food, car payments, etc.). So that means the recommended amount of savings should be between $15,000-$30,000 (3-6 months). If you find that you have lower or higher expenses, adjust accordingly. Since we always try to discuss the “Regular Person,” it doesn’t seem very realistic that you can easily set aside this amount of money. It is something that will take a lot of planning, saving, and time. If you want to calculate the amount recommended for you personally, check out the calculator via Nerdwallet. https://www.nerdwallet.com/article/banking/emergency-fund-calculator
How Do You Build It?
Setting up automatic transfers directly from your paycheck is the most ideal way because you don’t miss the money that you don’t see. You can start out averaging $5-$10/week and work your way up from there as you get more comfortable. Cutting back on spending and funneling that money directly into your fund is also a way to work on growing your reserve fund. Cancel your magazine subscription and instead set it aside for emergencies. When you receive a bonus, tax return, or even gifts, put it immediately into your savings instead of thinking of all of the things that you’d like to purchase. Definitely go back and review the blog post on 5/27/21 on Breaking Down Dave Ramsey’s Baby Steps 3-7 where I go into greater detail on tips on building an emergency fund. https://realpamelaferguson.wixsite.com/website/post/breaking-down-dave-ramsey-s-baby-step-3-7
Where Should You Save?
Where should you keep these reserve funds? Since you want to use these funds for emergencies, it is recommended that they are kept in places that are very liquid and where you have easy access. A high interest savings account is a reasonable choice, but, unfortunately, currently the rates are quite low. You can check out www.bankrate.com to find the local place that has the best rates for a variety of options. I personally use American Express Personal Savings online to keep a portion of the reserve funds since I can access it immediately. For this account, the current interest rate (as of 6/13/21) is .40%. Less than ½% is not a great return on investment. That is why I keep only a partial amount there for quick access. To find our more, investigate the following site to see if it is something that would be of interest to you. https://www.americanexpress.com/en-us/banking/online-savings/account/
Don’t feel that you have to put it all in one place. There are many different options for you, but I would recommend the highest interest rates you can find in a safe option (less aggressive) as you don’t want to lose a bunch of money when it’s needed for emergencies. I personally don’t prefer CD’s (certificates of deposit) because you can’t access them immediately without penalties. You may have to accept a lower interest growth to have the benefit of easy and quick access to the funds. Because if you’re in an emergency situation, you generally need the money NOW!
Because of this fact, I keep a portion of the money (40% in my case) in the savings account. (**This percentage is not set and can be adjusted to your comfort level.) This money can be IMMEDIATELY accessed without any wait. However, since the interest rates are so abysmal, I keep the lion’s share of my emergency fund (60%) in a higher yield avenue with Capital Group www.capitalgroup.com. It has been averaging over 10% return. I still have access to the money as well, but it may take a few days to get the money. I feel comfortable with this split where I have access to a large sum of money immediately and if I need more, I can access the Capital Group account.
When you hear the amount of $15,000-$30,000 for an emergency fund, it can easily make you feel overwhelmed and hesitant to even begin. It seems even more impossible when Suze Orman now says you should have a year’s worth of savings, or the average amount of $60,000 in reserve funds. Instead of getting defeated and giving up, take baby steps little by little until you get to where you want to be. There’s never been a better time to start and remember, every little bit helps. If you can only do $5/week, it will grow. Something is always better than nothing. Happy saving!
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