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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

An Emergency Fund Means Peace of Mind

Cars break down; serious medical problems arise; you can lose your job. Because we don’t know what each day has in store for us, you need to have money set aside for emergencies.

"Unfortunately, people today are spending more than they save," says Anthony F. Bruce, CPA, of Cherry Hill. "Many people who I see in my practice do not have a true emergency fund."

Do you have enough money available to pay for unforeseen expenses in a crisis? How much is enough? Many financial planning experts recommend having at least six months of your total family income in an emergency fund. "That's ideal," says Bruce, "But it can be quite a challenge for some people. You can start by totaling all your expenses for a month – then multiplying that times six."

The most important thing to do – rather than worry about what the "right" amount might be – is to get started. If you don't have an emergency fund now, here are some recommendations from the New Jersey Society of Certified Public Accountants (NJSCPA) to help you build one.

Start Small
To get off to a good start, don’t get overwhelmed by the idea of creating a fund to cover all your expenses for any contingency. Instead, pick a reasonable amount that is manageable for you to set aside every week.

Establish a Regular Saving Schedule
Stick to your regular deposits. If you save as little as $20 a week, you’ll be amazed at how quickly cash can add up once saving becomes a routine. If you do need to tap into the emergency fund, remember to pay yourself back. You can do that by increasing the amount you save each week until you have replenished the account. If that works, try to keep saving at that higher level as long as your budget allows.

Set a Realistic Goal
How much money should there be in your emergency fund? Experts recommend that you have six months of your income in reserve just in case you lose your job. If that sounds impossible, don’t be discouraged. The most important step is starting with small but steady deposits. Pick a small goal – maybe $500 – and aim to have that much by a certain date. Once you’ve achieved that, set a new goal. If saving six months’ worth of income seems impossible, then aim to save enough for several months’ worth of expenses.

Limit Access
You should be able to access your emergency cash readily when a crisis occurs, but if the money is too easy to get, you may end up using it for unintended purposes. Don’t accumulate the money in your checking account, for example, where it can easily be siphoned off for everyday expenses. Instead, open a separate interest-bearing savings account or money market account for your emergency dollars, and resolve to leave them untouched until you really need them.

Define “Emergency”
Determine what you mean by “emergency” and stick to your definition. For example, you may decide you’ll only use the money for medical emergencies if someone in the family loses a job or is unable to work or in the event of an accident or disaster. Establish in advance that finding a great deal on a beach vacation is not an emergency. You can always set up another “splurge fund” where you save money for indulgences.

Don’t Fall Back on Your Credit Cards
Many people use their credit cards to pay for necessities in a crisis, but this is a costly way to cover your needs. You will have to pay interest on the debt rather than earn interest on your emergency cash in an interest-bearing account.

Don’t Get Cute or Fancy
You need your emergency fund if you have an emergency. Just because you have some money set aside now, don't tie it up in a risky investment trying to earn more interest. "This is where you want to be a turtle and not a rabbit," Bruce says. "Put your emergency fund in a federally insured account that is completely secure."

Work with Your CPA
No matter what goal you choose, creating a plan and sticking to it are the best ways to get there. Your CPA can help you understand the financial emergencies you might face and the best way to save for them.

If you would like to receive more information on various financial matters, subscribe to E-CPA, the NJSCPA's free, monthly email newsletter. To subscribe, visit www.njscpa.org/finances or email a subscription request to e-cpa@njscpa.org.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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