Emergency Savings

The government shutdown has shed light on a problem that plagues many in this country: what would you do, if you suddenly were out of a job, or missed a paycheck? That’s what credit cards are for, right? Spoiler alert: No.

Pretty much any financial guru is going to tell you that one of the first things you should do when you are “getting your financial act together” is to set up an emergency savings fund. This is where you will want to keep 3-6 months’ worth of living expenses in a liquid (read: easily accessible) cash account. This is crucial. Why? What do you do if you are faced with an unexpected medical expense, home or auto repair, or some other disaster (like being forced to work for the government without pay)? 40% of Americans cannot afford a $400 emergency, according to a Federal Reserve Board report from last year. I am writing this blog while I am at a conference on retirement planning, that is telling us that Americans also don’t save enough for retirement. We’ll get to that in a future blog, but for now, one of the most important things you can do to prepare for your own future, is to start saving for emergencies.

How much should you save?

I recently took (and passed!) the CFP® exam, and the CFP® board standards suggested that if you were a dual income-household, you probably need only 3 months of living expenses, but if you were a single income-household, then save 6 months. Other finance “experts” are going to say, save 9-12 months. It really depends on your own situation. What is going to help give you confidence or reassurance, knowing you are covered? If you have a particularly unstable job, like a furloughed government worker, you may need to save more than you think.

Where should you put that cash?

Straight into your mattress. (Kidding.) For cash that you need to have readily accessible but want to earn more than your standard savings or checking account, you may want to consider a high-yield savings account or money market account. The important part is to be able to get at the cash easily, so you don’t want to have it locked into something like a CD, where there may be a withdrawal penalty, or something that fluctuates with the stock market, where it could lose money. You want to be fluid, and the return on the cash is not your priority.

What should I do if I don’t have enough saved?

Start saving immediately, even if you can only do a tiny bit at first. Every little bit helps. You may want to consider an app to help making saving easier. Some apps will automatically round up your purchases and put the change into a savings account for you, and one I recently discovered, called Tip Yourself, allows you to “tip” yourself for anything—say, if you exercised today, tip yourself $1.

Any opinions are those of Jill Carr and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.