Are You Prepared For A Financial Emergency?
Nearly 30% of adults have not put aside emergency savings to cover an unexpected need. Rest assured, if you fall into this group of adults it’s not too late to begin. Creating an emergency fund is critical to building and maintaining a strong financial foundation. Without a financial safety net, a job loss, surprise health event or a major home/auto repair could put you deeply in debt. An emergency fund is not one size fits all. It’s important to take into consideration potential scenarios unique to your life to determine what is right for your situation.
Regardless of circumstances, having access to liquid cash is a smart idea and will give you peace of mind.
Unsure of how much money to save? Financial professionals generally agree it is smart to keep 3–6 months worth of expenses in emergency savings. Read on to learn three easy steps to help you determine how much you need to save and how to get started.
Know What You Earn
The first step to build an emergency fund is to determine your net income. This is the money you take home AFTER all deductions have been withheld. Take advantage of online income calculators like this one from Smart Asset to help figure out your number. You will need to know:
• Salary before taxes
• Withholding allowances
• Pre-tax deductions (i.e. insurance, 401K)
• Post-tax deductions (i.e. Roth IRA, 529 savings)
Once you enter this information, along with basic personal information, the calculator will determine your take-home pay based upon your pay frequency.
Divide And Multiply
Once you know how much money you bring home yearly, divide that number by 12 and then multiply the result by the number of months you would like your emergency fund to cover. As a minimum, financial experts recommend saving 3 months of net income in liquid assets.
Make A Plan
Successfully saving for anything requires planning and discipline. Establishing a plan of attack will provide accountability as well as a framework for execution. Whether you save weekly, monthly or by paycheck, consider utilizing a high-yield savings account to reap the benefits of interest on your savings. To succeed, you must commit to your savings plan. Setting up regular automated deposits is one way to hold yourself accountable to your goal.
Your plan may involve sacrificing spending in some areas to generate extra income for your emergency fund. Take a good look at your spending habits to determine where you could be overspending. Additionally, consider contributing a work bonus or tax refund to quickly build your savings.
Life is filled with unexpected events. You do not want to have to choose between going into debt or selling long-term assets to pay for a financial hardship. Invest in your future self now by shoring up your emergency fund.
Call To Action
Do you think my tips were helpful in re-directing your focus and goals? Please share the article and shout out to me on Twitter!
You can also check out my firm, LexION Capital, for more tips on how to grow your wealth and become financially secure.
Elle Kaplan is the founder and CEO of LexION Capital, a fiduciary wealth management firm in New York City, serving high-net-worth individuals. She is also the chief investment officer and founder of LexION Alpha.
