Do you love surprises? What about surprise expenses?
I’m with you, no one likes unforeseen expenses but truth is, life is unexpected. To reduce the stress associated with unforeseen expenses, we usually advise our clients to build what we call an emergency fund.
What is an emergency fund? It’s simply an account in which you should save between 3 to 6 months of expenses. This money is set aside for emergencies such as car repairs, job loss or unexpected medical procedures. A new pair of Louboutin might be a fashion emergency but it is not considered a true emergency!
This account needs to be easy to access and free of market risks. Meaning it should not be invested in stocks or bonds to avoid market risks, and should not be invested in CDs because it wouldn’t be easily accessible without incurring penalties.
A simple solution is to open a separate checking or savings account. You could even opt for an online bank as some of them offer online savings accounts with no monthly fees and a higher percentage yield than traditional banks. For example, Ally Bank offers 1.5% annual percentage yield on its online savings accounts.
Keep in mind that if you have debt and no emergency fund, we might advise you to start saving a small amount for emergencies and apply the rest of your excess cash towards debt repayment. We usually decide on a customized strategy after reviewing your unique financial situation.
The overall purpose of this account is to provide peace of mind. We all know that stress is detrimental to our health. Knowing that the financial part of an emergency is covered can provide relief and a deep sense of security.
The best way to build your emergency fund effectively is to automate savings. Yes, it’s that simple. We humans tend to get excited about something, but rapidly lose interest. Have you ever tried to commit to a new diet or workout? How long did it last?
The key to success is consistency. Set up an automatic and recurring transfer to the account. It can be $20, $50, $500 or whatever makes sense for your budget. Check in on your progress towards your savings goal periodically and make sure to replenish the account after using it.
I challenge you to start saving now and gain peace of mind.