Author – Marilyn Albertson
Have you ever had a major emergency in your household? Did you have the cash flow to handle it? As you move through life, events often come up that you cannot anticipate but that require money immediately. Start now to build a strong financial foundation with an emergency fund.
Emergencies might include personal injuries, auto accidents, natural disasters, loss of jobs, major home or auto repairs, or a death in the family with accompanying expenses not covered by insurance. If your are in the farm or ranching business, emergencies could include poor crop prices, poor crop yield based on weather conditions, natural disasters, lack of adequate grazing for cattle, higher prices for feed and farm equipment, illnesses in herds or flocks and more.
What should you have saved?
Financial experts suggest having 3 to 6 months of take-home salary or 6 to 8 months of living expenses saved. (source 1 & 2) Another way to calculate your needs would be to assess the time it might take to find a new job of equal or higher pay if you were laid off your current job.
The Bureau of Labor Statistics for June of 2014, detailed unemployed persons by duration of unemployment. The report indicated that 48.5 percent were unemployed 15 weeks or longer, with 32.8 percent experiencing 27 weeks or longer of unemployment.
When should you start?
If you have not started an emergency fund, now is the time to start. You may feel you have debt you need to pay off before you can start saving. You might consider splitting your extra funds between the debt and an emergency fund. Even a little saved will reduce the interest costs at the time when you have to pay for an emergency. Financial planners advise consumers to wait to invest in retirement accounts, IRAs or the stock market until they have an emergency fund established that is easily accessible for the risks that could come up.
How will you save?
Start by creating a monthly budget and tracking your spending. Identify areas where you could cut back within your flexible expense category. For example, to help save you might try the “Step-Down Principle” by Alena Johnson, M.S. On a piece of paper create a stairway with four to six steps. Write down the way you now purchase the item on the top step. Then look at ways to step down the expense and keep working down the steps until you get to the least expensive way to purchase the item on the bottom step. Then ask yourself if you can step down one or more of the steps with this purchase. This idea can also be used for stepping down the number of times a purchase is made. For example, if eating out daily at lunch, could you cut back to three times a week or once a week and brown bag it the other days? This could add up to a significant savings over time to build the emergency fund.
Another way to calculate how to save is to use the PowerPay.org website. Calculators are available to determine how much to save and ways to pay down debt more rapidly to free up money for savings. You may download the free PowerPay Mobile app by visiting the iTunes app store. For a more comprehensive version go to www.PowerPay.org.
Where will you save it?
Compare interest rates at your local bank or credit union. Check out online banks, which also have good service and offer competitive rates. Some have higher rates but make sure they are FDIC insured institutions. Some accounts can be tied to your checking account so automatic deposits can be made directly from checking to savings. They may offer money market accounts which are variable and have teaser interest rates for the first 6 months with a guaranteed one-year rate for new customers. Read the fine print for features and limitations. It is wise for you to check periodically to see if you are still getting the best competitive rates. If not, don’t be afraid to move your money to another institution as long as it is insured.
Good luck saving for those unexpected emergencies!
And, for more preparedness information, be sure to come and visit the Utah Prepare Conference & Expo on September 27, 2014.
Marilyn Albertson, M.S., CFCS, has been a Utah State University Extension associate professor in Salt Lake County for 29 ½ years. She provides family and consumer sciences education with emphasis in money management for children, youth and adults; housing education; family resource management including food storage and emergency preparedness; and marriage and family relations for teens and adults.