Financial gurus all over America recommend having an emergency fund. But in our hyper-consumption society and ten-plus-year Bull market, this advice seems to have either fallen on deaf ears, or out of fashion. The government shutdown does shine a light on the savings crisis in America telling us that 78% of Americans live paycheck-to-paycheck according to a report by CNBC.
First of all, what is meant by an emergency fund? Your emergency fund should be readily available cash savings, not at risk, to cover all monthly living expenses. Total up your monthly expenses such as rent/mortgage, utilities, transportation, insurance premiums, groceries, prescription co-pays or out-of-pocket treatments, entertainment, membership dues, credit card payments – anything that you pay during the month. Don’t forget annual payments. Those are divided by twelve and you include one-twelfth in your monthly savings amount. That total of all expenses is your monthly spend, the amount of cash outlay you need to cover to maintain your lifestyle.
So how much do you need? This varies depending on whether you are a dual-income household, and whether you are married or single. For my clients, I recommend six months minimum as a basis. For married couples, dual-income, six months should suffice if both couples are high-earners. If not, build to six months and then work toward nine months of emergency fund. Married with one income, you should have nine months saved. If you are single, you should have a nine-month emergency fund regardless. If others rely on you, such as children or adult parents, stretch your goal to twelve months emergency fund.
How did we get here? How did we get to a point where missing one paycheck creates a financial disaster? Those answers are beyond the scope of this blog post. But, I suspect it is safe to say at least two contributing factors are the lack of financial literacy being taught in schools or at home, and the growing inability of people to separate needs from wants. We live in a society that outright discourages delayed gratification and saving cash for a goal.
Take action! Turn this on-going shutdown crisis into a personal action plan.
First, tally up your expenses as described above. Review them for services, memberships, subscriptions, etc., that you are no longer using and cut those. Your goal should be to cover the monthly costs for items that you do use and need.
Second, determine how many months you need to have by examining your situation: married, high income, single, dependents, etc. Set your first goal to save a one-month emergency fund, and build from there.
Next, resolve to start! That’s the BIGGEST hurdle in getting an emergency fund together. If you are a lower earning worker, it is a challenge, but starting now is key. Always pay yourself first! Follow that mantra for every job you ever have in your life. Ideally, we should all be saving at least 15% from every job over our lives starting with our first job – but that’s another blog post! If you have zero in savings, start by putting a twenty-dollar bill in an envelope or container each week. That’s about four coffee drinks per week – your latte factor! By week 52 you’ll have saved $1,040. Even at $1,000 you are better off than when you started. For those with greater means, examine your cash outlay every month and work with a financial planner to help you cut expenses and get on-track to savings.
Cash is a key component of financial security and an asset class that should be included in every financial plan. It’s time we remember that.
As an independent Certified Financial Planner™, I can help you plan for cash goals. Contact me and let’s get started on a savings plan for your personal emergency fund! #talktometuesday #education #Hireaplanner #stressfree #emergencyfund #savings #crisis