How to Save for Emergencies, According to a Financial Consultant
Protect your family with a rainy-day fund—here's how to start yours.
As the country falls deeper into economic uncertainty, many have turned to their emergency savings funds to keep their families afloat. But if you don't have one to begin with, don't worry—there's no time like the present to start putting money away to prepare for unprecedented times. We talked to Steve Sexton, a financial consultant and the CEO of the Sexton Advisory Group, who shared what you really need to know about saving for a rainy day.
An emergency fund is different than your savings account.
An emergency fund is different than a savings account, says Sexton—savings accounts are ultimately put towards the purchase of a specific item (like a car), event (like a cruise or vacation), or large planned expense (like a home). An emergency fund, on the other hand, is something you set aside solely to cover expenses in the event that you are without income for a prolonged period of time.
Determine how much you need to save.
The first step in starting an emergency savings fund is figuring out how much money actually needs to be in yours. To do so, Sexton suggests calculating your monthly expenses. "Start by estimating the cost of critical expenses, such as housing, food, health insurance, utilities, transportation, personal expenses, and debt payments," he says. A solid emergency account should have enough money in it to cover between three to six months of expenses.
"If you can't contribute to your emergency fund and savings account at the same time, I'd start with the emergency fund first," Sexton advises. "Once you have three to six months' worth of expenses saved in your emergency fund, you can start allocating a percentage of your earnings to your savings account." This will help to reduce your expenses and eliminate non-essential spending in order to be sure both accounts are funded. "Times are tough right now, but you can still build up your emergency fund, even if it's at a slower pace," he says. "From just setting aside $25 a week into an emergency account, you'd have $2,600 set aside in two years."
You can build up your fund in the midst of economic hardship.
Even if you're already struggling, you can still work on putting together an emergency fund, says Sexton. Identify what you can cut out of your budget upfront by reviewing your current expenses. "Start by reviewing all credit card and bank statements for the last three months," he suggests, adding that you should break your expenses down by category for a clearer picture before eliminating all non-essential expenses, like dining out, your daily Starbucks, fitness apps, unused gym memberships, and so on. "Shop around for competitive auto, home, and health insurance for lower costs," he says. "If you are renting, consider moving to a lower cost apartment." After you've checked these boxes, put all savings towards your emergency fund. "Once you reach your target, then direct the funds to a 401k or IRA to reduce your tax liability and grow your retirement accounts," Sexton notes.