As many Americans learned in 2020, emergency savings can provide a much-needed lifeline during periods of crisis or uncertainty. Adequate cash reserves can be critical for helping you stay on track during turbulent times by preventing the need to dip into long-term savings or incur debt to cover unanticipated expenses. However, according to Bankrate’s January 2021 Financial Security Index, only 39% of U.S. adults say they are confident they could pay for an unexpected $1,000 expense. Among those who are not prepared:1
- 18% would put the expense on a credit card and pay it off over time, incurring interest charges
- Another 18% could handle a surprise expense without borrowing but would have to make room in their budgets by scrimping on other items
- 12% would borrow from family or friends
- 8% would take a personal loan
While 44% of survey respondents expect their financial situations to improve this year, since 2014, the percentage of Americans who could tap cash reserves to cover a $1,000 emergency continues to hover between 37% and 41%.1 If you or someone you know is looking for ways to shore up savings or replenish cash reserves in the new year, the following steps may help.
1. Make saving a priority.
Savings should be high on your budget priority list, right after essential expenses for food, housing, clothing, transportation, and healthcare. If you’re not currently following a budget, the new year is a great time to create one. A study by the CFP Board found that having a household budget can positively affect your emotional state by reducing stress, anxiety and frustration. Among those who have a budget:2
- 62% feel more in control
- 55% feel more confident
- 52% feel more secure
2. Automate savings.
Once you determine how much you need to set aside each month, consider making savings automatic. One of the most effective ways to accomplish this is to direct a portion of your pay to a savings account before your paycheck hits your bank account. Check your employer to see if this option is available to you. If not, most banks allow you set up automatic deposits from your checking account to a savings account.
3. Keep emergency funds separate.
Ideally, you want to keep emergency savings in their own separate account, so you’re not tempted to dip into these funds to satisfy other goals, such as non-emergency home improvements or a family vacation. You also want make sure these assets are liquid and can be easily accessed when needed, using a check, debit card, or electronic transfer.
4. Look for ways to continually boost savings.
There are a number of ways to boost savings over time that don’t require a lot of pain or sacrifice. One technique is to increase monthly savings each time you receive a raise, bonus or promotion. If you receive a tax refund or economic stimulus payment, consider adding all or a portion of those funds to savings. If you pay off a credit card, car loan, or other debt, consider redirecting that “extra” money to savings, as well.
How much is enough?
Most financial professionals recommend that you set aside the three to six months' worth of living expenses for emergency cash reserves. However, the right amount for you should be based on your individual circumstances. Do you have a mortgage? Are you making car payments? What about credit card debt? Do you have dependents who rely on your income to meet their needs? In the event of an accident or illness, do you have short-term and long-term disability protection?
If you’re not sure how much you may need to pursue your short and long-term savings goals, contact the office to schedule time to talk.
P.S. If you need help with budgeting, the following articles provide information on a variety of tools and mobile apps that make it easy to create and manage your budget in real time: 11 Online Budget Tools and The 7 Best Budget Apps for 2021.