Working with a financial advisor can help you get in the habit of saving and develop a plan to start your emergency fund.
Nothing in life is guaranteed, and you can never be sure of when you will need the money that you don’t have. Accidents and emergencies happen, which might leave you stuck or wondering how to pay. Not everyone is prepared for these kinds of situations, which can leave them in sort of a pickle. Instead of reaching for your credit card and going into debt to pay off the hospital bill or your car repair, you can take from your emergency fund. However, you have to build one first.
Surveys have shown that about 23% of Americans do not have an emergency fund. Theoretically, this means that in the event of a health crisis, need for an auto repair, or loss of a job, that 23% may be struggling to make ends meet.
Starting the process of saving for your emergency fund can be the hardest part because you haven’t developed that kind of routine. You may be putting money into your regular savings account; however, your emergency fund is and should be separate. Saving a solid amount doesn’t happen overnight. In fact, for some, it can take years. That is why developing a plan that works is crucial, and a financial advisor can be just what you need for that head start.
There are financial advisors that recommend you have at least 3 months saved in your emergency fund, while others say that having up to 12 months puts you in a good place. Getting together with an advisor can help you come up with something that is customized to you. No matter what you decide, there are some important points to keep in mind when it comes to starting and maintaining your emergency fund.
Don’t Rely on Credit and Debt to Fund Your Emergency
Sometimes, without thinking, people will take out their credit cards in order to pay for emergencies or simply have the mindset of “I’ll just charge it”. This is not only wrong but also risky. You can run into larger problems down the road – like debt that you can’t pay off. Credit cards have some of the highest interest rates if you don’t pay your balance off every month.
Start with Small Goals and Grow from There
Establishing your goals will help you get a better idea of when you will reach the amount that works for you without overwhelming yourself. Based on the amount you need to save, aim for something that is easier to achieve. For instance, instead of saving for 3 months, shoot for 1. Once you have reached that goal, aim for one that is a bit more challenging, yet still attainable.
Every Small Bit Counts
Not everyone can afford to take out $100 of their paycheck and put it toward their emergency fund. It is likely to not be their only savings fund. Whether you are putting in $10 or $100, every little bit counts, and it is more than you had before. It may help to sit down with your financial advisor and establish how often you will put in $10 – every week, month, or paycheck.
Keep Your Savings Accounts Separate from Your Emergency Fund
Your emergency fund doesn’t have anything to do with your savings account. They should be two separate things. This way, you can properly identify which one to use in the event of an emergency and which one you can tap into for other things. Ideally, this emergency fund should not be touched unless there is a real emergency. It is crucial for you to have a set of criteria established so you can distinguish what to consider as an emergency.
Don’t Overbuild Your Emergency Fund
While you may want to continue growing your savings account, there is often a cap that you should put on your emergency fund. Your financial advisors will be able to help you establish what that cap is. Chances are this money will be earning a very low-interest rate, and it is probably not worth building a long-term account like a regular retirement or savings account would be.
Everyone has a different kind of savings plan, and when it comes to your emergency fund, it is crucial to have one established sooner rather than later. There are plans you can look into and advice that you can get from financial experts. Talk with an advisor, today!