David Lerner Associates: How to Build an Emergency Fund
Creating a healthy emergency fund can be a lofty and intimidating goal. But in these uncertain economic times, such a fund is needed more than ever yet almost two-thirds (62%) of Americans are not prepared to for unexpected expenses.
Emergency funds are a key component to a healthy financial life, and having a comfortable safety net sitting in an account somewhere, will give you peace of mind. It’s a good feeling to know that should anything unexpected happen requiring the use of savings to get you through a number of months, you’re covered.
So how do you accomplish this goal?
The first step is to understand exactly what it is. An emergency fund is cash that you’ve saved for the sole purpose of helping you maintain your financial obligations through the emergencies that life deals out. One sure way to dismantle this fund is to spend the money on non-emergencies. That is to say, you’ve accumulated several hundred dollars in savings and all of a sudden get the itch for an extravagant purchase.
If you want a savings account in order to reward yourself with something nice, then by all means, open a separate account, and call it your “Rewards Fund.” Then use it to buy that flat screen TV or a vacation to Hawaii, but don’t touch the emergency account.
Set your target low
Start with an achievable goal, like $500. That’s something that can be done in a few months or even less if you are frugal. Put a time limit on it. “I want to save $500 by June 1st.” Then break that down into how much needs to be squirreled away monthly, or even weekly.
Where to find the money
You may have asked yourself, “How do I save $50 a week, when I’m barely making ends meet as it is?” The trick is to find the savings in the money you’re already spending, rather than have to earn more. Take a look at your credit card payments. Is there a way to reduce your rates? Turn over your credit card, and call the number on the back. A simple request to get a rate reduction might result in a pleasantly surprising outcome.
Shopping around for better insurance policies can save you money. So can installing a programmable thermostat, planning your grocery shopping instead of just wandering around the aisles picking up random, unnecessary items on impulse.
Try reducing your number of dinners out per month. You’d be surprised at how much you spend on restaurants. Saving money on gas is easy, if you have a colleague who lives close by and is willing to car pool, or you might be able to use public transportation.
Ask yourself, “How often do I watch Netflix? Cable?” Get rid of any monthly bills for services you’re not using. Look for a better cell phone plan that could save you money. Before you know it, that $50 will be easily available to you and ready to be stored away in your emergency fund account.
In a few months, you’ll hit your first goal of say, $500. Now set another goal, maybe double the amount. And keep going until you can reach a goal of having an entire month’s worth of expenses sitting in your account. Then two months, three months, and so on.
If and when an emergency does happen, you’ll be able to sleep at night, knowing that you planned ahead and can continue living your life, undisrupted.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
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