Posted on November 18, 2015 by tamarageorge1
Did you know that 62% of Americans have less than $1000 in their savings accounts? And 21% of those people don’t have a savings account at all! That’s a sobering stat that says one thing: more than half aren’t prepared for a financial emergency.
What happens if you get sick, lose your job or need major car or home repairs? If you don’t have money you can access easily, you could end up going into serious debt – which will increase your stress levels and cost more in the long run, especially if you’re paying double-digit credit card interest rates. And if you’ve lost your job, money worries will put pressure on you to take the first role that comes along, rather than the one that’s right for you.
“Saving money is hard,” says Dan Allen, Financial Advisor with Manulife Securities, Inc. “And because most people have such easy access to credit when things are going well, they figure they can just borrow to cover an emergency. The trouble is, sometimes you can’t borrow more money if you’ve lost a job or become ill and your lower income doesn’t qualify you for an increase.”
“You should have 3-6 months’ worth of expenses saved,” he says. “And it should be in a place that’s easy to access so you don’t have to go into debt for a cost you can’t avoid, like a car repair or a job loss. Emergency resources are insurance, not an investment – it’s not about earning money on that account, it’s about having it there when you need it.”
7 strategies for saving
Visualize scenarios. What would you need if you lost your job? Or if you had to travel suddenly to see a sick relative? People tend to have an “it won’t happen to me” attitude, and aren’t in a mindset to save for an emergency. But you should always expect the unexpected.
Figure out how much you need each month. Factor in housing, transportation, food, etc., then multiply it by 3-6 months. That’s the lump sum you need to have at the ready.
Stash your tax refund. Instead of using it for a splurge, set at least part of it aside – it’s a relatively painless way to save.
Figure out where you can cut costs. Think about how much you spend on coffee, lunches out and other unnecessary purchases. Give up one or two things a week and set that money aside.
Schedule your savings. Treat your savings like any monthly bill – have it transferred into another account automatically so you don’t forget. And schedule it in right after payday; the sooner it comes out, the less tempted you’ll be to spend it.
Start small. Set aside $10 a week if that’s all you can manage. Then, once you’re used to that money not being available to spend, see if you can bump it up to $15 or 20.
Earn as much interest as you can. Put it in a high-interest savings account, which offers a better rate than a standard checking account while giving you easy access to your money when you need it.
But don’t worry – building up an emergency fund is something you can do over time. It doesn’t have to happen all at once. But the more you have saved, the less debt you’ll end up facing if you do run into an unexpected expense.
About Dan Allen
Dan Allen, CFP ®, MFA, EPC, is a financial advisor with Manulife Securities, Inc. He has over 35 years of experience helping families and business owners create wealth and protect their savings.
George, T. “Emergency Funds: Why You Need One and How to Build It”. November 18, 2015