Unfortunately, many people seek guidance from a financial planner when they are struck by a crisis. Maybe their home has been damaged by a storm or they just accumulated some costly medical bills or their car decided to break down on the highway. When things are going well, we don’t often think about what could happen and can be blindsided by the large expenses associated with catastrophes.
On the other side of the coin, people may seek assistance from a financial planner when they are make a positive life change. Maybe a couple is preparing for a new baby or a retiree is figuring out how to purchase a lake home. While these situations are wonderful, they can still cause financial strain and stress.
In both cases—the positive and the negative—an emergency fund is a necessary tool to ensure financial stability. Think of your emergency fund as a positive, healthy part of your financial plan, rather than a burden. It’s what will carry you through both the rough patches AND the major life changes.
When setting up a savings account that will act as your emergency fund, ask yourself how much you’d like to contribute each month and how you’ll resist the temptation to pull money from the account. I’ve worked with many well-intentioned people who have set up an emergency fund, but then tap into it whenever they feel strapped for cash.
One way to prevent yourself from dipping into your fund is to contribute a sustainable amount each month—something that will not make you feel pinched by the end of the month. You can also look at your spending habits (see my previous blog post) and look at where you might shift superfluous spending toward your savings.
But really, it all boils down to your mindset. If you WANT to cut back and save, you’ll find a way to do it. If you resolve to leave your emergency fund alone until you really need it, you’ll do it. Refocus the way you think about your emergency fund and recognize that it is truly for emergencies, not the designer outfit that you’ve been eyeing.
How much should you contribute each month? Each person’s income and life situation is different, so it is difficult to say “you should contribute $X to your account each month.” To figure out your optimal contribution level, talk to a financial advisor. Your advisor can help assess your situation and guide you on the specifics of saving for your emergency fund.
It’s time to rethink your emergency fund! Look at it as a pillow—a gentle cushion that will help buffer financial blows. It is your ally, not a something that weighs you down. If you’re unsure about where to start with your emergency fund, contact me today.