Unexpected financial expenses seem to crop up at the least opportune time. The car needs a new transmission, you lose your job, or a parent or child becomes ill, and you need to reduce your hours at work in order to care for them, resulting in an unexpected reduction in income. All of these expenses, and others, can drain savings quickly.
Why have an emergency fund?
You can resort to using credit cards to pay for emergency expenses; however, worrying about paying down your growing credit card balance can lead to further stress during an already difficult period. You will experience “one step forward and two steps back,” where it’s hard to see any progress.
How to create an emergency fund
The better choice is to establish an emergency fund now. Determine how much money you want to set aside in the emergency fund and set up an automatic deposit into that account once a month for a small amount, so that you establish the habit of adding to the emergency fund. If you have finished paying off a monthly loan of some kind, consider immediately setting that money aside for the emergency fund so you don’t use it for daily expenses. Set up an account with your bank that is not easily accessible, so there is less temptation to use the money.
Remember, a large screen TV or a vacation is not an emergency. If large items such as these are on your wish list, start saving for them separately and only use your emergency fund for true emergencies.
How much should you have in an emergency fund?
The rule of thumb is to keep six to twelve months of living expenses in savings for emergency funds.
Whereas a dual-income family could get away with six months of income in savings, if you are a single-income household, you would want twelve months of income saved.
If you and your spouse work for the same company, there is a greater risk of you both losing your jobs at the same time, it would make sense to keep twelve months.
Having an emergency fund will reduce your stress during periods of difficulty because you can tackle the situation and not worry about the financial aspect.
Michele Clark
Michele has more than 25 years experience in financial services and has developed a specialization in working with people who are starting to seriously think about their retirement or who are retired and facing all of the complex planning issues one faces during this time.
She works with clients to coordinate decisions around investments, retirement accounts, Social Security, funding health care, tax planning, cash-flow, maximizing employer benefits, charitable gifting strategies and estate planning.
Before joining Acropolis Investment Management, Michele was the founder and managing principal of Clark Hourly Financial Planning and Investment Management for nearly nine years with an additional sixteen years at banks and investment firms.
Michele has been quoted in such online and print media outlets as The Wall Street Journal, Money Magazine, USA Today, Market Watch, US News & World Report, CNBC.com, AARP, St. Louis Post Dispatch, Fox Business, Forbes, Los Angeles Times, Financial Planning Magazine, St. Louis Public Radio, Yahoo Finance, St. Louis Magazine, and others.
Michele earned her B.A. from Purdue University. She is a CERTIFIED FINANCIAL PLANNER® practitioner, obtained the Chartered Retirement Planning Counselor (CRPC®) designation from the College for Financial Planning, and is a NAPFA Registered Investment Advisor.
Michele has volunteered her time for financial literacy outreach at Financial Planning Days, Money Smart Week, Habitat for Humanity and others.
Michele has served on the Board of Directors of the Financial Planning Association of Greater St. Louis since January 2014 and is Past President and currently serving as Chair of the Board.