Planning Essentials
Most of us are creatures of habit. We find a certain comfort and safety in the predictability of our day-to-day lives. Unfortunately, that also means we tend to avoid thinking about or planning for unexpected and unwelcome changes. But change—sometimes drastic in nature—is inevitable from time to time. Whether it’s the sudden loss of a job, a precipitous market drop that impacts your portfolio’s ability to generate needed income, or an unplanned but necessary major expenditure, life without a financial “safety net” in the form of an emergency fund is a risky proposition.
Now, more than ever, it’s critical that you set aside a formal emergency fund forunexpected expensesand/or a reduction in income. Without one, you could find yourself having to run up high-interest credit card debt, drawing down the home equity you’ve spent years building, or needing to sell long-term assets (at a time when both the economy and the stock market are slumping).
Creating your safety net
Ideally, you want to set aside enough emergency cash (typically held in a liquid checking, savings, or money market account) to cover at least six months of living expenses. For small business owners or those employed in highly volatile industries and sectors, a 12-month cushion may be more advisable.
As with any goal, the more time you have to build your safety net, the easier the task is to accomplish. The simplest way to get started is to just begin setting aside a fixed amount each month into a separate emergency fund account. To help speed up the process, you might want to also consider depositing all or a portion of each year’s tax refund and employment bonus into this account. Because theyrepresent money that falls outside of your normal monthly budget, it’s often much easier to save these windfalls without feeling as though you’re depriving yourself.
Alternatively, if you own awhole lifeor universal life insurance policy, you may be able to tap into its built-up cash value as a source of funds in an emergency. A policy’s cash value is the amount of money you would receive by surrendering the policy and functions like an investment account that accumulates tax-deferred interest. Unlike a bank loan, you don’t have to pay back a loan against cash value and withdrawals are tax-free up to the amount of the premiums you have paid. But it’s important to understand that interest charged when you borrow against your policy’s cash value will gradually reduce the death benefit your loved ones receive.
Lastly, if emergency funds are needed before you have enough time to build an adequate safety net, you may want to consider contacting your mortgage provider and establishing a home equity line of credit. You should only access the funds in the event of a true financial emergency and not for day-to-day expenses.
Don’t wait until it’s too late
Preparing for emergencies is a critical part of a thoughtful and comprehensive financial plan. By having sufficient funds set aside for immediate but unexpected cash needs, you’ll be in a much better position to weather short-term economic turbulence and market volatility while remaining on track toward your long-term goals and objectives.
Key takeaways
- Every investor should strive to put aside enough cashto cover at least six months of living expenses in the event of an unexpected income disruption or major unplanned expense.
- This financial safety net will not only afford you the peace of mindthat you’re prepared to weather short-term storms, it will protect you from having to liquidate long-term investments at potential fire-sale prices.
- Building your emergency fund doesn’t need to be difficult.There are a variety of ways to achieve the goal without mortgaging your future.
Eagle Strategies LLC (Eagle) is an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Eagle investment adviser representatives (IARs) act solely in their capacity as insurance agents of New York Life, its affiliates, or other unaffiliated insurance carriers when recommending insurance products and as registered representatives when recommending securities through NYLIFE Securities LLC (member FINRA/SIPC), an affiliated registered broker-dealer and licensed insurance agency. Eagle Strategies LLC and NYLIFE Securities LLC are New York Life Companies. Investment products are not guaranteed and may lose value. No tax or legal advice is provided by Eagle, its IARs or its affiliates.
FAQs
Having a reserve fund for financial shocks can help you avoid relying on other forms of credit or loans that can turn into debt. If you use a credit card or take out a loan to pay for these expenses, your one-time emergency expense may grow significantly larger than your original bill because of interest and fees.
Why should you always have an emergency fund? ›
The whole point of an emergency fund is to prevent you from having to add to your debt in times of need or to scramble to wrangle money at the last minute. You want to be able to focus on the crisis, not raising money to cover it.
What are the 3 things having an emergency fund will help you save? ›
An emergency fund is a bank account with money set aside to pay for large, unexpected expenses, such as:
- Unforeseen medical expenses.
- Home-appliance repair or replacement.
- Major car fixes.
- Unemployment.
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
Why is it important to have an emergency fund quizlet? ›
The purpose of an emergency fund is to set aside money for unexpected financial emergencies and to provide a sense of financial security. You should keep your emergency fund in the same account as your spending money.
What are the three reasons to save money? ›
There are three basic reasons to save money. First, we save for an emergency fund. Second, we save for purchases. Third, we save for wealth building.
What is the 50 20 30 rule? ›
Key Takeaways. The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
How will life be better if you have an emergency fund? ›
This financial safety net will not only afford you the peace of mind that you're prepared to weather short-term storms, it will protect you from having to liquidate long-term investments at potential fire-sale prices. Building your emergency fund doesn't need to be difficult.
What should be an emergency fund? ›
People in stable jobs are recommended to put away 3-6 months' salary into their emergency fund, whereas people with lower job security are recommended to save 6-12 months' salary. A stable income ensures a consistent and bigger emergency fund. The number of earning members in the family also matters.
Do 90% of millionaires make over 100k a year? ›
Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
How much should I have in my emergency fund? Aim to have enough in a savings account to cover 6 months of expenses. Everyone's situation is different, so you can adjust that number based on your circ*mstances.
What are the benefits of saving money? ›
Saving provides a financial “backstop” for life's uncertainties and increases feelings of security and peace of mind. Once an adequate emergency fund is established, savings can also provide the “seed money” for higher-yielding investments such as stocks, bonds, and mutual funds.
Why is saving safer than investing? ›
The biggest difference between saving and investing is the level of risk taken. Saving typically results in you earning a lower return but with virtually no risk. In contrast, investing allows you the opportunity to earn a higher return, but you take on the risk of loss in order to do so.
Why is it important to have an emergency fund? ›
Your emergency fund will help protect you from 2 different types of financial emergencies: spending shocks and income shocks. Spending shocks—like a broken windshield or a root canal—are unplanned, unwanted expenses.
What is a millionaire's best friend? ›
Here's a little secret: Compound growth, also called compound interest, is a millionaire's best friend. It's the money your money makes. Seriously.
Why is it important to have an emergency plan? ›
The main objective of emergency planning is to reduce injuries, protect the community and maintain business continuity. An emergency plan usually includes necessary procedures during a crisis, a clear set of roles and responsibilities and established instructions for local emergency response and recovery bodies.
Why shouldn't you keep your emergency fund money in your checking account? ›
Why shouldn't you keep an emergency fund in a checking account? Checking accounts are designed for transactions such as paying bills or writing checks. As such, your emergency fund may be better off in a separate account where the money generally remains untouched.
How much should you eventually have in your emergency fund? ›
People in stable jobs are recommended to put away 3-6 months' salary into their emergency fund, whereas people with lower job security are recommended to save 6-12 months' salary. A stable income ensures a consistent and bigger emergency fund. The number of earning members in the family also matters.
Is it more important to have an emergency fund or pay off debt? ›
On one hand, paying off debt could save you thousands in interest. On the other hand, failing to build your savings could force you into further debt if you encounter unexpected expenses. Generally, building an emergency fund should be your priority.
