For the longest time in wealth management the recommended amount of money to have in an emergency fund has been three to six months of non-discretionary expenses (mortgage, rent, utilities, groceries). Typically, three months was the recommendation for a single individual or married couple with dual incomes. Six months was generally for married couples with one income earner. Every so often, something comes along challenging conventional wisdom, and that can be a good thing. In this case, it’s a pandemic that’s changing how we think – about many things. The pandemic has wreaked havoc on many lives. People have been laid off, lost jobs, are working less hours, losing income. Those with emergency funds have seen them dry up, and those that didn’t have them to begin with were worse off. For the future, it may be wise to consider a longer (more money) emergency fund. For example, we can […]
emergency fund
Just Getting Started
At a point in some people’s lives, they conclude they need some sort of assistance with their financial situation. This could be a recent high school or college grad determined to start off on the right track, or those in their mid to late working careers wondering if what they’re doing is the “right” way of doing things financially. In either case, the hope may be to make as few mistakes as possible along the way. When considering this situation, there are a few things to look at first, before moving on to other planning areas. In other words, think of the follow as a good foundation to have before expanding on or continuing your wealth management plan. Emergency Fund. This is the money set aside to pay for non-discretionary expenses that will not go away in the event of an emergency (loss of a job, medical, etc.). Although the […]
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Axioms for Graduates
As the spring semester comes to end for high school and college graduates, I wanted to perhaps give some unsolicited advice as these newly christened adults start out on their own and begin making life choices and financial decisions that will impact their future. Resist the temptation to spend everything you make. Instead, do your best to save as much as you can. In fact, it’s possible for a recent college grad to go from making hardly anything during their college years to a decent starting salary. Pay yourself first. Establish an emergency fund of 3 to 6 months of living expenses and save to your 401k and IRA. It’s absolutely possible to save $23,500 annually ($18,000 to the 401k and $5,500 to the IRA). In ten years, without interest or compounding, you’ll have saved close to a quarter-million dollars. All by the time you’re between the ages of 28 […]
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How to Make Your Saving Automatic
Sometimes it can be difficult to save for emergencies or for retirement. While physically not demanding, the mental strain can be a hump that is hard to get over. In other words, we experience a little bit of “pain” or mental anguish if we have to physically hand over money or write a check. So how can we overcome this anguish? Automate. First, determine how much you need for an emergency. This can either be to start the fund or to replenish amounts that have been used. Generally, it’s a good idea to have 3 to 6 months of non-discretionary expenses (expenses that don’t go away if you lose your job or become disabled) set aside in an FDIC insured bank account. Some individuals may find it more comforting to have 6 to 9 months or 9 to 12 months. It’s up to you. For retirement, I recommend saving 15 […]
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6 Year End Tips for a Financially Productive 2017
As 2016 comes to a close in a few weeks and we start into 2017, here are some good tips to consider to start 2017 off with some good strategies that will hopefully become habits. If you’re not doing so already, set up your payroll deductions to save the maximum to your 401k. There’s plenty of time to your payroll allocated so your deductions start coming out on the first paycheck in January. The 2017 maximum contributions are $18,000 for those under age 50 and $24,000 for those age 50 or older. To deduct the max, simply take the number of pay periods you have annually and divide it into your maximum contribution amount. This will allow you to save the maximum amount over 2017. Consider doing the same to maximize your IRA contribution. Those limits are $5,500 (under 50) and $6,500 (over 50) respectively. Check your allowances on your […]
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A Risk Management Checklist
Although many individuals have various risk management policies in place, sometimes those policies get brushed aside and every once in a while the dust needs to be wiped off of them and perhaps some updating needed. Here’s a checklist to consider the next time you review your risk management strategies. Auto Insurance – Review your coverage to make sure it’s still adequate. Liability limits of at least $250,000 should be the norm. Limits of $500,000 up to $1 million are better. If you drive an older car, consider raising your comp and collision deductibles or eliminating them altogether to save on premiums. Upside down on your car loan? Consider gap insurance. Better yet, don’t have a car loan. Home Insurance – Make sure your home is insured to its reconstruction cost. This is the cost to rebuild your home using today’s prices for materials, labor, etc. It is NOT the […]
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An Emergency Fund for Retirement
Many individuals have heard about having an emergency fund while working and saving for retirement. Generally, the rule of thumb has been to keep 3 to 6 months of non-discretionary living expenses on hand in case one loses their job, becomes disabled, or an unforeseen emergency occurs. But what about those individuals who are nearing or already retired? What should their emergency fund look like? Do they even need one? One of the bigger risks that pre-retirees and retirees face in retirement is sequence risk. Sequence risk is generally defined as the risk of even lower portfolio returns due to making withdrawals from a retirement account when the market has experienced a downturn. In other words, a retiree experiences sequence risk when their retirement account drops in value due to market volatility, and they make a withdrawal (or withdrawals) after the account has dropped in value. Another way to put it […]
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Where to Keep Your Emergency Fund
Ask any qualified financial planner and they’ll generally tell you to have at least 3 to 6 months of living expenses set aside in order to fund a “rainy day” in the future. This emergency fund is there to help you pay bills such as your mortgage, utilities, and groceries in the event you lose your job, become disabled, or to pay for an unexpected emergency (such as a car or home repair). Some folks may need greater than 6 months expenses if they lose a job that may be hard to find again or a single income family that relies on one individual’s income.
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Safety with an Emergency Fund
Today’s message is about Safety – but not things like “don’t run with scissors” or “wait a half hour after eating to go swimming”. What we’re referring to is the old concept of having an emergency fund. The primary thing that you should take away from this Safety discussion is Peace Of Mind. An emergency fund is a vital component of your overall financial toolkit. You should have 3 to 6 months’ worth of expenses set aside in a liquid, stable account, such as a bank passbook savings account or a money market account. By “liquid” we mean that the funds are easily valued and withdrawn as necessary. By “stable”, we mean that the funds are not at risk due to market volatility, but also that there is some return in the form of interest to the account, however small.
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Emergency Fund vs. Credit Card
During moments in our lives we are faced with bad luck or simply things that go awry and inevitably cost us money. From a car needing repairs to the water heater going out, or an unexpected doctor bill we don’t plan for these to happen, but we can in place in case they do. As financial planners we generally recommend that our clients have emergency funds in the event that such events are going to happen. On different occasions I will get the argument that an emergency fund isn’t necessary if one has a credit card to simply pay for the unplanned expenses when they happen. Generally, in an emergency a credit card can come in handy as one may not have quick access to cash, etc. However, the flaw with thinking that a credit card can be used in place of an emergency lies here: How do you pay […]
Sterling Raskie, MSFS, CFP®, ChFC®
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