MEmergency car repairs, unexpected medical bills, and loss of income are things we tend not to think about until they happen to us.
It may not be as fun as saving for a vacation or home renovation, but having an emergency fund can help you cope with short-term setbacks or experience long-term financial consequences. It could make a difference.
What is an emergency fund? Why is it so important to have an emergency fund, especially during times like these? Here's a primer.
Financial solvency issues
Financial experts generally recommend setting aside three to six months' worth of living expenses in an emergency fund. Without it, you risk losing what you worked so hard to achieve if life changes. Stashing your funds helps you meet your monthly obligations, keep your credit report clean, and protect your livelihood.
organize your priorities
An emergency fund should be at the top of your list of financial priorities. Emergency reserves are designed to provide a safety net to prevent financial disaster.
Next, saving for retirement is important to protect your financial future. Even better if you can preserve both priorities at the same time.
If you're currently saving for the future, consider putting a portion of your monthly contributions toward an emergency fund. Once you have a sufficient level of funding in your emergency account and regularly contribute to your retirement account, you can start setting aside funds for optional items like new furniture, vacations, and car upgrades.
set goals
Determine the amount needed to maintain your lifestyle in the event of a long-term loss of income. If you no longer get paid, at least how much money will you need on hand each month to pay your bills and buy groceries? Then multiply this amount by 6.
Start where you can
If you don't have a lot of money to start an emergency fund right now, don't let that stop you from opening an account and working toward your goals. Any amount, whether it's $50 or $500, is a step in the right direction.
Your next tax refund, bonus, or raise is also a potential source of cash to boost your emergency fund. Review your current budget and see where you can cut back on spending and save more money.
Create and follow guidelines
An emergency fund should be set aside in case of a financial crisis. Even though it is attractive, it is not an account for paying extra in life. With guidelines in place, you can avoid touching these funds unless necessary.
Keep your emergency fund safe and within reach
When uncertainty arises, you may need money fast. For this reason, your emergency savings should be in cash or in easily accessible investments like money market funds. Also, in case you might want to use your emergency fund, open a dedicated interest-bearing savings account, possibly at a separate bank from your other accounts, to keep your emergency fund in a safe place. It's a good idea to keep it.
By working with a knowledgeable financial advisor who understands your savings goals, you can prepare for unforeseen circumstances that can change the lives of you and your family in an instant.
Jessica B. Jimenez is a financial advisor with John L. Myers & Associates, the personal wealth advisory practice of Ameriprise Financial Services LLC in central New York. She specializes in fee-based financial planning and wealth management strategies and has been in practice for 14 years. To contact her, visit ameripriseadvisors.com/jessica.b.jimenez.com or call 315-251-0512.
