The Importance of Having an Emergency Fund
If the government shutdown proved anything, it’s how many Americans are living paycheck to paycheck. Are you financially ready in the event of a job loss, extended illness or some other emergency? EisnerAmper Private Business Services advisor Tim Schuster offers some helpful tips on creating (and sustaining) a fund that can help you sleep a little better at night should a crisis arise.
Dave Plaskow: Hello and welcome to The Bottom Line. This podcast examines the everyday business and finance issues faced by closely held businesses. We hope to provide you with news you can use in what we like to think of as a jargon-free zone. I'm your host, Dave Plaskow, and with us, as always, is Tim Schuster, Manager in EisnerAmper’s Private Business Services Group. Today we'll discuss with Tim how to approach creating a fund for emergencies. Tim. Hello.
Tim Schuster:Dave. It's a pleasure my friend.
DP: We're talking on a Friday afternoon. The news just came through that they're pretty close to ending the government shutdown. It looks like at least a temporarily moratorium. Great news for a lot of people. But during the shutdown, one of the things that really struck me is the number of people and families who weren't prepared for something like this. I heard in the media a lot of stories, a lot of people sharing their stories about how they were out of money or that they only had enough money to last for one or two weeks. People were literally driving to work and running out of gas. And I read a number that approximately one-third of Americans have no fund to cover emergencies.
TS: It’s actually really amazing. You're 100-percent correct. This is, honestly, no doubt a difficult situation for many people. But this is also something that can be corrected, where an emergency fund can really help you sleep at night.
DP:And you don't need a magical windfall. You don't have to hit the lottery. And you don’t need to create a $50,000 emergency fund overnight.
TS:Exactly. I mean, don't get me wrong, I'd love to personally hit the lottery. But there are goals you should have in mind; it could be milestones. It might be $5,000; it maybe $10,000; it may be $50,000. Whatever is good for you personally. The key is to regularly pay a modest amount into this fund each week, and it can be as little as, honestly, a few bucks a day. You see those commercials all the time on TV “for just 25 cents a day ...”
DP:And what are some ways to enhance this, to make it more palatable?
TS:One thing that you can do is just have money automatically deducted from your paycheck. That's easiest way because then you're not missing it. If you happen to pick up odd jobs where maybe you earn a couple hundred bucks here, a few hundred bucks there, you can start putting a little bit of way into this fund. Just put it into a savings account. Don't put in checking. Most people tend to put it there. Just put it in your savings account where it's not being seen, and really you're not going to feel the pain of losing this money because you're taking a little off the top every single time.
DP:What else can you do?
TS:If you happen to get any sort of windfall: a raise, a tax refund— right now we're in the middle of tax season where people are seeing refunds starting to come through—then deposit a portion of that into your emergency fund. You didn't have it initially, so it's found money. You can still treat yourself, and you may not feel as guilty if at least you're saving some of it for a bad day.
DP:That's a good way to balance it. Now I hear some experts suggest that your emergency fund should be three to six months’ worth of expenses. Really?
TS:That's a common target. But keep this in mind, when we say expenses we really mean necessities like utilities, medical expenses—not one of those $6 lattes every morning. Again, you don't need to amass this emergency fund overnight. The key is not to wait until you get sick or potentially lose your job or your car dies to figure out how to cover this. Start saving for this now; take the time and do it.
DP:Those are some good dos. Do you have any don'ts for us?
TS:Yes, absolutely. Do not have a loose definition of what an emergency is. I would argue that the using this money for a vacation, for instance, is hardly an emergency. That's a completely separate fund that actually you can have yourself. You can have multiple funds. You can have an emergency, a vacation, and a daily use fund. Look, it definitely involves foregoing some sort of immediate gratification. It's not a matter of if an emergency will happen, but when. And you’ll be so glad you have that fund.
DP:Now what about for those people who currently don't have an emergency fund, or they've just started one, and an emergency strikes. Any options there?
TS:Yes. So recently, especially with the shutdown, you have been seeing a lot of credit card companies that are offering incentives to lower the interest rates, not necessarily forego any debts that you may have, but help with the burden. If you have these issues, you want to be forthright with any lenders that you have. The other option actually is you can actually take out some money as well. But you want to be forthright with credit card companies and whoever you potentially owe money to. Because if you do that sooner rather than later, they can work out deals with you in order to help out on any sort of payments that you have to make.
DP:Well, that's good to know. Now, one of your New Jersey Historical Society of fun facts gets to the issue of the government shutdown. Tell us about it.
TS:It's a little personal for myself. One of the things I love to partake in his craft beers. Well, during the shutdown, which started way back in December, all of these breweries that wanted to release new beers actually weren't able to because the ATF has not been in service in order to review the labels, which they need to do in order for a beer to be distributed. So any new beers that a lot of our craft breweries in New Jersey were trying to release couldn't because the ATF wasn't in session in order for them to actually approve those labels.
DP:Thanks again, Tim. And thank you for listening to The Bottom Line as part of the EisnerAmper podcast series. If you have any questions or there's a topic you'd like us to cover, email us at email@example.com. And visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast where we get down to business.
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