We often discuss the importance of retirement savings, but what about setting up an emergency fund? Did you know that 78 percent of Americans live paycheck-to-paycheck, with no concrete way to handle unexpected expenses? You might think this statistic applies only to lower-income people, but a surprising number of middle class households would also face significant challenges in the event of one missed paycheck or an unexpected car or home repair.
So, what’s your plan for dealing with unexpected budget shortfalls?
Many people say they would charge emergency expenses on a credit card, but this isn’t usually the best plan. That 2,000-dollar car repair could end up costing hundreds more after you pay interest. Plus, you would have to deal with the stress of making revolving payments for many months (or longer).
Borrowing from family or friends can work in a pinch, but it’s probably not something you would enjoy doing. At the very least, this isn’t a surefire plan, as those individuals could experience their own financial hardships at coincidentally the same time.
Most experts recommend a simple savings account, at your regular bank, as the best way to stash a bit of cash for an emergency. The account will be easily accessible, and earn a small amount of interest over time, too. Three to six months of expenses is the recommended target goal for a rainy day fund, although you might aim a bit higher if you have a large household , own an older home that is likely to need repairs, or have some other circumstance that puts you at risk of needing extra emergency funds.
So, how do you put aside money when it feels like your budget is already tight? Consider the following tactics:
- Consolidate debts into one low payment, so you can free up extra cash each month
- Take on a side gig, even temporarily, just to build up some savings
- Engage in a “no-spend” month each quarter; don’t spend on anything that isn’t absolutely necessary
For more help with budgeting and planning for the future, give us a call. We can help you examine your finances more closely, analyze your savings strategies, and make recommendations to get you on a more stable track.
