Emergency Funds: A Pain until Needed



Summer is right around the corner. Knowing the cold weather is behind us is a great feeling. Although, now that winter is over, you may realize your house needs some repairs.  Maybe the paint is peeling, the roof is leaking or windows need replacing.  The question is; do you have an emergency fund to cover these unexpected expenses?

Emergency Fund 101

An emergency fund is a separate account where you accumulate money to cover unanticipated expenses. These expenses may be the home repairs listed above, a job loss or a medical emergency. These occurrences are not anticipated and can create a lot of anxiety and stress on your finances.  

Therefore, you need to be PREPARED. That’s the beauty of an emergency fund.  It acts as a safety net to minimize the burden of an sudden expense. But, how much should you put in your emergency fund?

There are many beliefs regarding the amount you should save. Some believe it should be at least 3 months of your living expenses, while other say as much as 9 months. According to a Federal Reserve survey in 2015, 53% of respondents did not even have enough to cover at least 3 months of expenses. Although you can delay repairs, this deficiency would create a major hardship if these people lost their job or main source of income.

Many different factors can also change the amount you think is necessary. For example, losing your job in an industry where re-employment is difficult may result in you needing a larger emergency fund.  Regardless, your initial step should be to calculate all your monthly expenses. Include the essentials: rent/mortgage, utilities, groceries, car payment, then add other needs.  Calculating this total, will allow you to establish a basic number to plan your saving.

The graph below shows how quickly your savings accumulate. It illustrates the total amount saved by depositing as little as $25, $50 and $100 dollars a month over 3 years. 


As you can see, by implementing a savings plan you will build your account to $900, $1800, and $3600 respectively. Once you reached the ideal number for your emergency fund, you will be better prepared for any unforeseen financial costs.

Other Benefits

Additionally, knowing your ideal number can have additional benefits.  This number will assist you in adjusting your entire budget.  You will have a better understanding of the amount you can contribute to investable assets and retirement funds.

Understanding the appropriate amount to have in reserve will allow you to allocate funds to better performing investments.  Since emergency funds should be kept in a separate checking, saving or money market account, you will earn a low rate of return. As of now, these accounts usually earn less than 1%.  Therefore, you should not over contribute to this account.  The main point is to keep these funds liquid, so you can get to them quickly and with minimum costs. For example, it does not make sense to have $15,000 in a savings account earning .05% when all you may need is $5,000.  The excess amount should be working harder for you in another investment.   


Summary,
While the initial set-up can be daunting, it can rescue you when needed. Establishing an emergency fund can help with an individuals’ preparedness for unforeseen financial hardship. Setting money aside from each paycheck into a separate bank account will help you reach your ideal emergency fund number. Then, when an emergency happens, you can keep calm, knowing the funds are there to be used as planned.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Griffin Financial Advisors, LLC. The opinions expressed are those of Griffin Financial Advisors, LLC and are subject to change at any time due to the changes in market or economic conditions.

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