Planning for the Worst: The Importance of Emergency Savings
If an unexpected expense of $400 or more came your way tomorrow, would you be able to cover it? Four in 10 American adults could not, according to The Federal Reserve’s most recent Report on the Economic Well-Being of U.S. Households. That statistic became national news in January, as furloughed government employees visited food pantries, signed up to become rideshare drivers, and relied on credit cards to survive the long shutdown. Here in Bucks County, local businesses such as Jules Thin Crust, The Pineville Tavern, and Bucks Co. Children’s Museum offered free food and admission to unpaid federal workers and their families.
As a community bank, The First loves to see local institutions and people coming together to support each other through a crisis. But we’d also like to help you build an emergency fund, so you’re prepared for unexpected expenses, job loss, and other obstacles. While we never know when these events will occur, it’s no surprise that everyone faces hard financial times now and then. Planning for the worst with emergency savings will help you face the future with confidence.
How much should I save for an emergency?
Personal finance experts agree that an emergency fund is a crucial aspect of overall financial well-being. However, their recommendations vary when it comes to how much you should save. Consider setting both short-term and long-term goals for your emergency savings. If the idea of covering six months of living expenses seems impossible, start by saving $500. That’s enough to pay for many unanticipated car or home repairs. More importantly, setting a small goal that you can meet relatively quickly will boost your confidence, building your momentum to meet a larger goal.
What should that larger goal be? Calculate how much you (or your family) spend each month on essential costs like food, housing, and transportation. You can always eliminate discretionary spending if you lose your job or encounter another type of financial emergency, but you can’t stop paying your rent or mortgage. Five months is about how long it takes to find a new job, according to a recent survey from staffing agency Ranstad US, so multiply your monthly essentials budget by six, just to be on the safe side, and make that your long-term emergency savings goal. You can still celebrate smaller goals along the way, in $500 or $1,000 increments, for example. People tend to have more success with big goals when they can “think small” and break them into much smaller steps.
Whatever the amount of your savings goal, consistency will be the key to making it happen. Perhaps you’ve heard the financial advice to “pay yourself first.” At The First, we make this easy with our Statement Savings Account. Schedule regular transfers from your checking to savings account. For example, if you auto-deposit $50 into your savings account on every payday, you’ll hardly notice the difference and your savings will steadily increase.
True Emergencies vs. Cash Flow Shortages
Do you ever run out of money before the end of a pay period? This type of cash flow shortage is common among American workers–78 percent live paycheck to paycheck, according to a 2017 survey from CareerBuilder. If this is your situation, you may have trouble building an emergency fund. However, there are ways to overcome recurring cash flow shortages.
Look at your budget as objectively as possible. Is there room to cut back? Perhaps you could lower the cost of a bill, such as downgrading your cable package or spend less on a discretionary category like dining out. Try to pare down your monthly expenses until there’s room not only to make your paycheck last until the next one but also to put aside something (however small) for emergencies.
Once you’re in a rhythm of saving, protect your progress by getting clear on what you will–and won’t–use your stash for. You may even want to type up an official-looking list you can refer to when you’re tempted to tap savings for a non-emergency. Here are a few ideas for what to include on your list of true emergencies:
Buck’s County’s unemployment rate of 3.4 percent is less than the national average. Still, large regional employers like financial services and pharmaceutical companies continue to announce layoffs and hiring freezes. Here are the top 50 employers in the county, led by Central Bucks School District and Doylestown Hospital.
With an average deductible of $1,500 for individual coverage through an employer plan, even the insured can find themselves with expensive medical bills after a visit to the ER or major surgery.
Older cars are cheaper to buy and insure, but they are also more likely to need expensive repairs. One minute you’re driving along, the next you’re on the side of the road waiting for a tow truck and wondering how much it’ll cost to get moving again. From engine repairs to a new transmission or timing belt, an unexpected car repair can easily put you out for $500-$1,000.
If you own your home, you live with the possibility that an expensive repair could arise at any time. From fallen trees to broken heating or cooling equipment, there are numerous instances when you might need to spend a few thousand on fixing something in your home or yard.
Save with Bucks County’s oldest community bank!
Looking for a local partner to help you grow an emergency fund and meet other financial goals? For more than a century, The First has remained independent and committed to our community, reinvesting all our deposits in local businesses, local mortgages, and local people. Check out our savings account options, including KidsFirst Savings and Holiday Club, and visit your nearest branch in Newtown, Langhorne, Richboro, Levittown, Wrightstown, Washington Crossing, Fairless Hills, Jamison, Warminster, New Hope, or Doylestown to learn more and open an account today.