INDONESIAKININEWS.COM - You’ve probably heard time and again that it’s important to have a rainy day fund set up “just in case” something u...
But we’re now at a time when having an emergency fund is more vital than ever.
The coronavirus pandemic was a prime example of how something unexpected can have devastating effects on the economy at large and on an individual level, too.
While we all hope the worst of it is over, here’s how to be prepared in case it’s not — plus how to set up a fund for unexpected future national emergencies.
Why You Need a National Emergency Fund
Part of being prepared for any contingency, big or small, is having a reserve of emergency cash at your disposal at all times.
When you can’t rely on accessing your funds electronically, you’ll need some legal tender to buy food, gas or other necessities.
“Whether it’s Mother Nature or some other disaster out of your control, you always want to be prepared by having some emergency cash on hand,” said Annalee Leonard, an investment advisor representative and president of Mainstay Financial Group.
“Banks and ATMs may not be up and running for days after a strong storm. I recommend my clients have three to five days’ worth of spending money, just in case.”
How To Decide How Much To Save
To decide how much to save for an emergency fund, you’ll need to ask yourself a couple of questions:
- How much will I need for an extreme catastrophic event?
- How much can I afford to save?
“It’s wise to have a small amount of physical cash at home for the truest of emergencies when banks are not operating,” said Priyanka Prakash, managing editor at Fit Small Business, a company that finds the best small-business software, services and financing options.
Aim To Save $2,000
“Individuals should be prepared to pay for essential or non-discretionary expenses out-of-pocket,” said Brett Tharp, CFP and financial planning education consultant at eMoney Advisor. “Temporary lodging or shelter, fuel, food, water and necessary medications fall into this category. This will differ for each person depending on their level of preparedness or perception of how likely a catastrophic event might be.”
Two-thousand dollars should cover those costs.
“The rule of thumb I advise my clients is to keep $1,000 to $2,000 in cash in case banking operations are shut down due to a national emergency or catastrophe,” said Gregory Brinkman, president of Brinkman Financial in Tulsa, Oklahoma.
There’s No ‘Magic Number’ for How Much
To Save in Your Emergency Fund
Despite these suggestions and what some other experts might advise, though, there’s no magic amount you should have nestled away in your emergency fund. The answer for how much you should save for an emergency situation is that you should do what feels right to you. No matter the amount, an emergency fund is absolutely necessary — so make it a priority to build one.
Even if you can’t afford to save much, it’s better to save something rather than nothing, Prakash said. So if you can only afford to set aside $1,000 for an emergency fund, that’s better than not saving at all.
The Cost of Covering Necessities
Take into account that in a national emergency, inflation will rise, demand for necessities will increase and price gouging will likely ensue.
With all that in mind, in addition to your regular emergency savings, you should prepare to have enough to cover the following costs in a national emergency situation:
- Water — 10 gallons $28
- Gas — 20 gallons $86
- Portable solar generator $130
- Battery-powered lights $20
- Emergency solar hand-crank radio $20
Prices for gas and water will likely be much higher in the event of an actual national state of emergency. Note that the items in the table are emergency purchases for one person.
The Cost of an Emergency Kit
You should already have some kind of emergency kit that includes these recommendations from Money.com:
- Batteries and tools: $122
- First aid supply kit: $48
- Nonperishable food: $120
- Medication: $38
- Spare clothing: $44
How Is a National Emergency Fund Different From Other Savings?
Unlike a regular emergency fund — which should be used to cover things like unemployment, medical or car emergencies, emergency home repairs or bereavement-related expenses — a national emergency fund should be reserved for catastrophes in which you cannot use credit cards.
Regular emergency savings should be stashed in some kind of savings, money market or certificate of deposit account. Your savings for a national emergency fund should be kept mostly in cash.
“Avoid the stock market because you can lose (your national emergency money) right when you need it the most,” Prakash said.
Neither type of emergency fund is meant to be dipped into or spent like disposable income, and creating one takes the same approach as that for a rainy-day fund, a nest egg or any other savings.
How To Start an Emergency Fund
The first step in saving for a national emergency fund is creating a budget, said Rachel Cruze, author and host of The Rachel Cruze Show and The Rachel Cruze Show podcast.
“A zero-based budget is best,” she said. “This is where your income minus expenses equals zero, so you are giving every dollar a name. Even if your income has changed or you’ve lost your job, list out any possible income you could have coming in and all your expenses. This will help you to see what can be cut from your budget so you can stretch your money further and find ways to save.”
Set Savings Goals
Once you set your budget and see how much money you can realistically dedicate toward savings, it’s time to start setting some goals. Financial author Dave Ramsey and many other experts suggest starting small. If you’re looking to set aside $3,000 in one year, that would mean you’ll have to save $250 per month over the next 12 months. Extend your savings goal to 18 months, and that’s $166 per month.
Or you can automate saving a percentage of your income. “Put aside about 10% of your monthly take-home income for your emergency fund,” Prakash said.
Make Saving for Your Emergency Fund a Priority
It’s especially vital right now to focus on saving, with job insecurity at a high and stock values plummeting.
“It’s important to not panic but to be proactive in planning your finances over the next few months, considering different strategies for saving more money and having cash on hand,” said Chalmers Brown, CTO and co-founder of Due. “I recommend doing a review of your new budget, considering your current job situation as well as accounting for reductions in spending. For example, since you are quarantined, you are most likely spending considerably less on gas, eating out and entertainment. Take that money out of your bank that you would have spent and put it in a lockbox as cash.”
Put Other Contributions on Hold While You Build Your Emergency Fund
When you’re in the process of building your emergency fund, limit other saving contributions or debt repayments to only the necessary amount, Tharp said.
“For example, contribute enough to your company’s 401(k) to get the full company match and allocate the additional funds to your emergency savings,” he said. “Additionally, maintain the minimum payments on outstanding debt to keep loan balances steady while directing additional money toward your emergency fund. Once you’ve built up enough savings, you can continue to contribute money to other longer-term goals.”
Should Your National Emergency Fund Be All Cash?
If you’ve managed to save up $15,000 in emergency funds over time, for example, it might not be a prudent idea to have all that money in cold hard cash sitting around your house. For one reason, it’s unsafe, and two, it might actually be more than you need.
“There is a price to putting away a large amount of money for a rainy day: That price is inflation, which has averaged about 1 to 2% per year in the last few years,” Prakash said. “To minimize loss from inflation, it’s wise to not keep too much of your emergency fund at home in physical cash. By keeping the bulk of the money in a savings account or a certificate of deposit, you can at least earn some interest on it to counteract inflation.”
Consider Opening a Separate Savings Account To Serve as a National Emergency Fund
While it’s smart to have up to $2,000 in cash in case of a bank shutdown, the rest of your emergency fund should be kept in a bank. Depositing your savings into an interest-bearing checking account or high-yield savings account can help multiply your savings over time.
“When you set aside savings — whether for a vacation or for life’s emergencies — you want to be able to get to it quickly but not keep it somewhere that’s too easy to access,” said Chris Hogan, author, financial expert and host of The Chris Hogan Show. “Your money is safe inside a bank. Bank deposits are insured by the FDIC and are protected up to at least $250,000. The best place for your emergency fund is a money market account or savings account. If you want to keep some cash at home, that’s fine, but I don’t recommend cashing out your savings.”
Source: gobankingrates
