The cornerstone of a strong financial foundation is a solid emergency fund. When we work with our clients to build their financial plans, the first thing we determine is if they have enough rainy-day savings.
An emergency fund is exactly what it sounds like: Money set aside for unexpected situations. Let’s face it, life throws us all a curveball on occasion. A roof may spring a leak, your car wears out, a child needs emergency surgery or your income suddenly disappears.
The trouble is that we’re not always great at preparing for the unexpected. A recent survey by Bankrate found 25% of Americans have less than three months of living expenses saved up, and 28% have no emergency savings at all. This means that for more than half the country, even a small wobble in their day-to-day finances could leave them in dire straits. While no one can predict the future, we can prepare for it. Your rainy-day fund should be easily and readily accessible. That doesn’t mean a cookie jar of cash, though. A simple checking account at your local bank with ATM access can be a great option. A money market account with check-writing privileges is another alternative.
Of course, you also need to determine how large your emergency fund should be. One longstanding rule of thumb is to keep six months of living expenses at the ready. Two-income households might consider budgeting for a minimum of three months of living expenses instead. High-spending households might need more.
Building up six months of expenses may seem daunting. We believe in setting small, achievable goals: Start by saving just one month of expenses. Once that’s done, you can begin working on other savings needs while continuing to build your fund.
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