Do i need an emergency fund
Question: How important is it to build an emergency fund?
A: Emergencies are coming. Whether we are facing natural disasters, health issues, the loss of loved ones, or the loss of our jobs, it is important to set aside funds to help us recover from the unexpected. Managing your budget can be stressful, and resorting to credit cards or family loans after an emergency can add unnecessary stress.
Below, we’ll answer some frequently asked questions about setting up an emergency fund:
- What is an emergency fund? An emergency fund is money set aside in a checking account or money market account that is easily accessible for unforeseen events. It doesn’t include that new flat screen TV you want, a new car, or a beach vacation. An emergency fund should only be used for real emergencies, such as car accidents, medical bills, unscheduled home repairs and, most miserably of all, unemployment.
- How much should I plan to save in my emergency fund? The more stable your household income, the less you need an emergency fund. However, a good rule of thumb is to save three to six months of expenses. If you are the only source of income or don’t always have a stable income, then a six month fund would be a smart consideration. It is important to recognize that there are two types of financial emergencies. One is an unforeseen expense; the other is job loss. So while thinking about how much to put aside in your emergency fund, you should consider the stability of your income. Think of your contributions as simply “paying you first”.
- When should I use my emergency fund? When faced with a sudden expense, it may seem like an emergency, but it may not be. Before accessing your emergency fund, ask yourself these three questions: Is it unexpected? Is it necessary? Is it urgent? If most of your answers are yes, it is most likely an emergency and it is worth drawing from your emergency fund.
- How do you start saving for an emergency fund?
Set a monthly savings goal. Set a goal for how much you want to save on your paycheck each month and set it aside in your emergency fund, trying not to stray from your savings commitment. A good starting target is 10%.
Adjust how much you save. Over time, your savings options may change. You can get a promotion or a bonus, which means you could save even more.
Consider saving your tax refund. If you’re expecting a refund, saving it to your emergency fund is a great idea.
Small savings will add up. When you get change, whether it’s coins or small bills, put it in a jar at home and when it fills up, transfer it to your fund.
Automatically move money to your emergency fund account. Many employers offer a direct deposit option and can split your paycheck into multiple accounts.
Starting to save for your emergency fund today can help you prepare for unforeseen emergencies in the future. In order for your emergency fund to be available in a major emergency, it must be in a healthy balance. Put money in the fund and forget about it – until you have a real emergency.
If you would like help determining how much and how quickly you can save, we recommend that you consult a trusted financial advisor to help you create your savings plan. The peace of mind that you will gain knowing that you are financially prepared to overcome an emergency is invaluable.
Crystal Faulkner is a Cincinnati Market Leader with MCM CPAs & Advisors, a CPA and Consulting Firm providing expert advice and beyond thinking for today’s public and private businesses large and small. , non-profit organizations, government entities and individuals. Tom Cooney works at Wealth Dimensions, an investment advisory firm. For more information call 513-768-6796 or visit online at mcmcpa.com. You can listen to Tom and Crystal daily on WMKV and WLHS on “BusinessWise,” a morning and afternoon radio show that features successful people, businesses, organizations and issues from across our region.