|
|
|
Brandon and Randi,* a young married couple, are models when it comes to staying on top of their finances. They are paying down their mortgage and budgeting carefully to ensure their financial needs are met, both now and later in life.
However, the couple is weak in one area of their finances—their emergency fund. The National Foundation for Credit Counseling says one third of Americans have no emergency fund, and 57% of those who emergency savings don’t have enough set aside.
Brandon always thought that if they ran into a crisis, they would just use their home equity line of credit (HELOC) to bail them out. Unfortunately, with the declining housing market, HELOC is not a safe bet for emergencies. Today, lenders are less likely to make a loan based on HELOC if they think it is in their best interest. You can no longer rely on home equity for “emergency money.”
Brandon and Randi both have good jobs with stable incomes, but what if the unexpected happens. What will they do? Unemployment has reached a four-year high of 5.5%, and it takes an average of four to six months to find a new job after being laid off.
Brandon was shocked to learn they were not prepared for an emergency. So he and Randi decided to find solutions before they encountered a crisis. Preventive maintenance is always cheaper than emergency repairs.
Do you have adequate funds set aside for emergencies? To determine this, start with an accurate record of your monthly expenditures. Once you determine your monthly expenses, most financial planners agree that you should save three to six months of expenses (money for house payment or rent, food, auto, taxes, insurance, etc.) during a good economy to see you through a job loss or a medical emergency. In lean economic times, you need six months to a year set aside for emergencies. This may seem like a daunting task, but remember, it is always better to be prepared.
Don’t be afraid to adjust your daily activities in order to establish emergency funds. Avoid frivolous spending. Stop eating out. Pay ten cents for a cup of coffee at home rather than splurging on the latest triple-fat, mint mocha latté at the local coffee shop. Skip vacation for a year. Do whatever you need to do to squirrel away your savings. Establishing an emergency fund is tough to accomplish, but it vital for your financial health.
Where should you put the money you save? Hiding it under the mattress is a thought. The money is close at hand in case of emergency, unless, of course, the emergency involves a house fire!
A better option is to invest your money where it will earn interest (although income is not the main objective), and where you have easy access to your money without early withdrawal penalties. It is also good idea to put your emergency funds where they are not subject to the fluctuation of the stock market.
Consider high yield savings accounts, money market accounts, and money market mutual funds. Free Will Baptists also have access to money management trusts with the Free Will Baptist Foundation. These trusts historically have paid higher interest than the national average on money market accounts and CDs.
It will probably take 18 months to two years to build an adequate emergency fund. Be creative with the way you save, and remember that every little bit helps you reach your goal. Some suggestions for building a fund include: saving your change at the end of each day, diverting extra payments from your mortgage into an emergency fund, and picking up a part-time job.
When your fund is in place, don’t touch it unless you have a non-budgeted, necessary expense. Be prepared to update the amount in your emergency fund whenever you encounter a life-changing event: spouse, baby, job, house, etc. Keep an eye on your fund. Make sure you are never caught between a rock and a hard place with nowhere to turn.
Brandon and Randi are not set for the worst yet, but they are preparing for whatever may come their way. Being prepared is half the battle. You will sleep better at night with an emergency fund in place.
*Not their real names.
About the Writer: John Brummitt is business manager for the Free Will Baptist Board of Retirement. To learn more about retirement options, www.boardofretirement.com.
|
|
