Have you read this alarming statistic? According to a May report from the Federal Reserve Board, 4 in 10 Americans don’t have the funds available to cover an unexpected $400 expense. I don’t know what concerns me more: the widespread lack of even a small emergency fund, or the stress that so many people are feeling from living paycheck-to-paycheck
I consider myself one of the lucky ones. As a financial planner, I confess to being a little obsessed about being financially prepared. My wife Jenna and I live pretty leanly, so we have little debt, we invest what we can and, perhaps most importantly, we’ve built up a solid emergency fund. But despite the best laid plans, life happens! And in the last 6 months, we were hit with a perfect storm of unexpected expenses.
It all began when our second son was born in November, bringing with him the added expenses of another mouth to feed, diapers to buy, doctors’ appointments to pay for, and the doubling of our daycare bill. Luckily, we had 9 months to plan for the arrival of the stork, so Jenna had saved up vacation to supplement her unpaid maternity leave. Even so, new-baby bills were flooding in and we were down to a single paycheck. But we were managing.
In January, things changed again. We had been talking about buying a new home “soon,” but a hot seller’s market in our area spurred us to sell our existing home right away. It wasn’t an inexpensive adventure. To “stage” our kid-friendly home for prospective buyers, I had to fix some things around the house. I did the work myself, but a few trips to Home Depot added up to about $200. Next, we had to rent a storage unit to hold our excess things. At $75/month for 2 months, there went another $150. Plus, because I was spending every spare minute prepping for the move while Jenna took care of both kids, we found ourselves eating out more than our budget allowed. Even without any splurging, we forked over $150 to a handful of normally budget-friendly restaurants. That put the total for the pre-move expenses at just under $500. But at least our emergency fund was doing its job. We may have been emotionally spent, but money wasn’t a concern… yet.
Amazingly, we found the perfect new home just days after we’d accepted the offer on our house (which sold in a single day!). That meant making the physical move. When we were younger, that meant filling up our cars and making a few trips from one place to another. This time around, our move required professionals—to the tune of $1,000 for the 20-mile trip. Moving also meant that we needed some time without the kids underfoot, which meant making multiple 60-mile trips to Jenna’s parents’ house to drop them off, and another 60 miles to pick them up afterwards, adding $200 in gas to the list of expenses. We were emotionally stressed out (I challenge anyone to try to find new daycare in a new town just weeks before your wife returns to work after maternity leave!), but we did it. We’d racked up another $1,200 in bills, but we were in our new house and all was well.
Until it wasn’t. Suddenly summer hit (what happened to spring?!), pushing the thermostat in our new home to a sweaty 85-degrees. When we flipped on the A/C, nothing happened. The fix wasn’t covered by the home warranty, so I had to write a check for $170. Then the transmission on my car went out—an $1,800 fix. Plus, I’d put off replacing the old tires in the fall (I was saving for a new baby, after all), and it couldn’t wait any longer. There went another $800. To add a good dose of salt to the wound, I even wrecked the car last week—the one I had just fixed!—adding a $500 insurance deductible to the list. Life happens… and this time it happened to the tune of $5,000.
It’s been a stressful time, but I can only imagine how overwhelmed we would have been if Jenna and I didn’t have our emergency fund to cover the storm of expenses. If, like 4 out of 10 Americans, you don’t have the emergency fund you need in place, take these 3 steps to start building this important foundation today:
- Make building an emergency fund your #1 goal. Depending on your other assets, an emergency fund may be the only resource you have to cover unexpected expenses—whatever they may be—which can force you to rely on credit cards to pay the bills. If you have nothing saved to date, allot every extra penny to meeting this goal. That may mean foregoing investing and even paying down debt—at least for the moment.
- Start by saving about 3 months of living expenses ASAP. It may sound like a lot, but your “starter fund” should have enough to pay all of your bills for at least 3 months. A good rule of thumb is to sock away 15% of your salary every month until you reach your goal. Depending on your individual situation, that initial target may be anywhere from $5,000-$10,000. You may have to live pretty lean for a bit, but what a relief it will be when ‘life happens’ in the future!
- Grow and maintain your fund—and your security—over time. As your salary grows, it’s inevitable that expenses like your mortgage and other costs of living will increase as well. That means that if your salary doubles, so should your savings. And remember to replenish your fund as soon as possible after borrowing from it to cover life’s latest emergency expense. Your goal is to have easy access to the cash you need, whenever you need it, for the rest of your life.
Of course, everyone’s needs are different, so working with your financial planner is your best bet to be sure you’re on track for a more confident, stress-free future. And if you have questions or concerns, please reach out. Our team is happy to help!
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