Last winter, I was driving with my husband and kids to Long Island to visit my in-laws. Ten hours and three tired and cranky children later, we were within 20 minutes of our destination. Then it happened. My husband was driving but I could feel that there was something wrong with the minivan. The gears wouldn’t shift. Suddenly, there were lots of lights going on in the dashboard. We made it off the freeway and coasted into his parents’ neighborhood. The car died before we could park it but at least we made it to where we were going. My husband and his dad were able to push it into a spot to park.
Why I am telling you about my car dying on our trip to New York? Well, this was my most recent financial emergency. Between the new transmission, the rental to get us all home, and the additional trip my husband had to take to Long Island to retrieve my car, it was no less than $5000 in unplanned expenses. I certainly was not happy about it but it could’ve been much worse.
How do your savings compare?
Have you heard the statistic? Less than 40% of Americans have enough saved to handle a $1000 emergency. Yikes! That’s stressful because let’s face it, life happens. I have a house, three children under the age of 12, and three dogs. Believe me, emergencies happen. A couple of years ago, I spent $13,000 to repair some damage my youngest did to our bathroom when flushing toy trucks. That’s just a couple of recent examples from my own life.
We might not know when but we do know large unplanned expenses will occur. We can plan for them. How prepared are you for the next emergency in your life?
In times of crisis, you don’t want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you’re protected when a financial emergency arises. One way to accomplish this is by setting up an emergency savings fund, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.
How much should you have in an emergency savings account?
Most financial professionals suggest that you have three to six months’ worth of living expenses in your emergency savings account. However, the actual amount should be based on your personal circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying on student loans? Are you making car payments? Other factors you need to consider include your job security, health, and income. The bottom line: Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.
Building your emergency savings
If you haven’t established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:
- Save aggressively and automatically. If you have the option, use payroll deduction at work. At a minimum, budget your savings as part of regular household expenses
- Declutter and sell the things you have around your home that you don’t need
- Cancel unused or unnecessary subscriptions
- Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)
- Use liquid assets (those that are convertible to cash within a year, such as a short-term certificate of deposit)
- Use earnings from other investments (e.g., stocks, bonds, or mutual funds)
- Check out other resources
A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, has to be paid back (often at high interest rates). As a result, you shouldn’t consider lenders as a primary source for emergencies.
Where to keep your emergency savings
You need to have access to your emergency savings when you need it. However, an FDIC-insured, low-interest savings account isn’t your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk.
It’s important to note that certain fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date), such as CDs, impose a significant penalty for early withdrawals. So, if you’re going to use fixed-term investments as part of your cash reserve, use a ladder (stagger) their maturity dates over a short period of time (e.g., two to five months). This will ensure the availability of funds, without penalty, to meet sudden financial needs.
Review your cash reserve periodically
Your personal and financial circumstances change often–a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.
Does your savings need a boost?
Do your savings need a boost? Sometimes it’s just a matter of getting a little momentum going and having some accountability. We will be hosting a Jump Start Your Savings Challenge in early June. You can learn more by joining our Facebook Group: Moms Managing Money.