Few, if any of us, escape life’s financial challenges. Whether it’s a layoff at work, unexpected medical bills, or the loss of a spouse’s income, having sufficient reserve funds to pay even one or two months’ worth of our bills can drive many to impossibly strict budgeting, the loss of real property, and sometimes even to bankruptcy.
As important as any other item of your budget, building an Emergency Savings Account with funds sufficient to pay three to six months’ worth of living expenses can provide the financial buffer required to survive while you get back on your feet.
So, even while you’re repaying your current debts, budget for regular deposits into your Emergency Savings Account at least until you reach the level of three months worth of expenses. Many financial planners even suggest having six months worth of expenses in such an account. To be sure, you should consider how long it might take you in your particular career and position to find and secure another job should your current income cease. Positions in some professions take longer than others to find.
Early on, consistency is much more important than quantity, so even a $10 deposit each month may be a good start. Many tend to spend whatever “surplus” money they notice in their checking account, so take out the savings amount as soon as your paycheck is deposited. To simplify things, have your bank or credit union automatically transfer $10 each month. When the money is out of your checking account, you’ll be less tempted to spend it.
Once you have reached your target Emergency Savings balance, take the monthly amount budgeted for this account and begin applying it toward any consumer debt you may still have. Once you’re out of debt, that monthly amount should then go towards investments and retirement planning.
- Create and live by a monthly personal or household spending plan.
- Designate a new account for your Emergency Savings, whether it’s a savings account, certificate of deposit, or a money market savings account.
- As soon as you get a paycheck, deposit the Emergency Savings money into your account, even if it’s just $10 per month. Increase as your budget and income allow.
- Determine how much you pay out each month for expenses.
- Keep depositing money into your Emergency Savings fund until you have a balance equal to at least three months worth of necessary expenses.
Best wishes in working with this vital tool. Often called a financial “cushion,” am Emergency Savings Strategy provides comfort in good times and a much softer landing during challenging times.
If you have any questions, would like to discuss your financial challenges, or are just looking for advice, please call us at your convenience. As always, we are here to help and look forward to hearing from you.