With everything going on right now - cash is king. No, I don’t mean sell all your investments, but you should have some cash stashed away. Ever wonder why the wealthy stay wealthy through every recession? It’s because they have the assets and resources to ride through the hard times and can then capitalize on the good times - I want this for you and am here to tell you how.
I’m going to cover an important pillar that builds a solid financial foundation– The Emergency Fund. No, it’s not sexy - but it’s necessary.
What is this emergency fund?
It’s a savings account that holds 3 - 6 months’ worth of your expenses. To calculate this, you need to know your monthly expenses. See Budgeting is Your Friend, It Creates Cash Flow to learn how to do this and get my budgeting template.
To determine how many months of expenses you need depends on how long it would take you to (hypothetically) get a new job if you lost yours, coupled with how much would make you feel secure. Security is a very important factor - if you feel secure, you are willing to take more risks (invest) and not dip into your other goals.
Why is this so important?
If an expected event happens in your life...WHICH IT WILL. For example, perhaps your AC goes out in the middle of the summer, or your Mom has an unexpected medical event and you need to fly out to see her (last-minute flights = $$$) or maybe you’ve recently lost your job due to COVID-19. Whatever life throws at you, you’ll now have the money to handle the situation.
When to build it?
Now! Before you start working on your goals; whether that’s saving for a home, traveling around the world, going back to school, or increasing your retirement savings, building your emergency savings is a must to avoid taking from those goals you’ve been working so hard on to achieve. Or worse, you go into credit card debt – talk about a MAJOR demotivator.
What happens when that “rainy day” event happens?
That is what your emergency fund is for! You tap into those funds and then as soon as you can refill your emergency fund back up to 3-6 months of expenses. Then, you get back to working on those other goals.
Where should I put these emergency fund savings?
Not in the stock market. These funds need to be easily accessible and not be subject to risk. Also, don’t stash it in a savings account that is earning .05% - .10% interest (based on today’s interest rate environment)! Cough cough……Chase, Wells Fargo, Bank of America. Your money would be earning nothing. Inflation on average is 2% - 3% so you would be losing money. Look for a high yield interest savings account or money market fund. Check out bankrate for some high yield savings options. I like Marcus, Ally, Barclays, and Vanguard’s money market funds to name a few. Do not put this account in a CD.
Having this emergency savings will change your financial behavior for the positive. You will learn to pay for the unexpected events with cash, instead of putting it on the credit card and not being able to pay it off.
Having this savings account will provide you with the peace of mind you are looking for. What many of my clients value from their finances is security. When an unexpected event happens, knowing you have it covered provides a priceless level of security and comfort.
If you would like help getting this account set-up and building security into your financial life schedule a FREE 30-minute call here.
