In other words, an emergency account or savings account is money for the “Just in case” situations we all run into at one time or another. We often cover this topic in Financial Coaching with our clients.
Income not spent and put aside for your future becomes your “Just in case Funds”.
I have heard the word “savings” ever since I can remember and now, I am thinking… what does that mean to me and how does it work? In my role as a financial planner and retirement advisor, I help clients establish their emergency fund, which is a critical part of your financial plan.
Self-control and willpower when it comes to your emergency fund
We all know that savings is a must and yet so hard to do. We put away $20 or more and then something happens, and we withdraw our savings.
Self-control and will-power what does this mean? Is it positive or negative? Self- Control is defined as the ability to manage your actions. It’s like when you want the last cookie, but you will use willpower to avoid eating it because you know it isn’t good for you.
Like using up your savings for things or wants you do not need because it isn’t good for you.
At least 6 months of expenses in your emergency fund
What’s good for you and me is to save! First you must save for emergencies to have a financial cushion. How much cushion you need is based on your expenses and income, but a good rule of thumb is at least six months of expenses. This amount will help you make it through tough times and give you breathing room and time to adjust and make changes. It’s your “Just in Case” funds.
Where to put the money that is the question? It is always good to put your money in short term vehicle investments like regular deposit savings, CD’s or any money market. Short term money should never be invested in long term investments like the stock market, or bond markets.
Remember, what is your purpose? The purpose is emergency money to be available for just in case and not to be used for other purpose.
How do we save for an emergency fund?
Shopping with discounts and points is one way of savings smart shopping. Put away the discount and add it to your savings. Pay off your credit cards monthly and save the interest you saved. Another way would be to buy appliances, furniture, etc. on installment with 0 APR by paying it off within the months agreed. It could be 12 months or 24 months depending on the agreement. The savings you have saved should be calculated and put in your savings account. Most people don’t bother and do not realize the real savings plan and strategy they created. Put it away so you can see it and make it work for you.
Benefits of an emergency fund
The next time you have an emergency expense, you won’t have to put it on a credit card and pay interest until you pay it off (just remember to return to putting money back into your savings).
Imagine the confidence you will feel when you know you’ve got an emergency fund to back you up when you need it most.
Think about being covered for copays and emergency medical expenses! Take a load of your mind!
If you are laid off, you’ll have money to cover your living expenses and therefore you’ll have less stress.
Save as much as possible and max out your contributions if you can into your retirement IRA, SEP IRA, Simple IRA, 401K or a 403B. What does that mean? You just moved your taxable money pocket to non-taxable money pocket for the future. It is still your money. You can also use a ROTH however they are not for everyone (do your due diligence). The taxes you save should also be put in the savings account and saved adding to your savings.
Stay out of being broke! Be consistent and diligent and keep saving. You will get there, and you will feel great!
Lillian Meyers CFP®, CDFA®, EA is a financial planner in Sonoma, California helping clients live their best life through the use of financial planning, investment management, and other sophisticated financial options.