According to conventional wisdom everyone will at some time have a need for emergency funds. Unfortunately many people still live their lives “paycheck to paycheck.” As a result, setting aside money for unexpected expenses can be a real strain on one’s household.
Before we tackle the issue of how to save for a rainy day, let’s figure out how much to save “just in case.” Most companies and nonprofits I work with say having six months worth of expenses set aside should carry their organization through a financial emergency. I think the same holds true for most families. A good starting point is to set aside at least six months of living expenses – household expenses, food and clothing allowances, health care costs and, of course, transportation expenses, to name a few.
Sure, this is easier said than done so here is some help on how to start. First, set a goal and talk with one of our financial experts at First County Bank about enrolling in an automatic savings program, which can be set up to deposit a portion of your paycheck to a savings account. Our trusted advisors will help you navigate your options to find the best savings plan to suit your individual lifestyle. The key is having immediate liquidity so be sure you don’t tie your emergency fund up in a CD, which generally makes funds harder to access at a minute’s notice. Investment products are also not the best vehicle for an emergency fund because of their inherent risk so you may want to steer clear of those.
Another tip is, resist the temptation to spend your tax refund and add it to this emergency account instead. Additionally, reviewing your expenses carefully may provide you with an opportunity to plan your budget and watch unnecessary expenses until you have achieved your financial goal. There are many easy-to-use online tools to help you save; a simple Google search is a good starting point for that.
Finally, resist the temptation to break open this “piggy bank” for a vacation or any expense that doesn’t meet the definition of an emergency. You’ll find that the alternatives to not having an emergency fund—like borrowing from a friend or family member— aren’t ideal. Just watch any episode of Judge Judy to see how badly that can end.