Emergency Funds First
One personal finance expert says, “An emergency fund converts a CRISIS to an inconvenience.” And we agree! When it comes to your students building their savings, an emergency fund should be one of the first priorities.
Why? Because it’s a fact of life that emergencies happen. The longer you live, the more responsibilities you have and the more money you MAKE, the more you should expect the unexpected. Tell your students to think of an emergency fund as a safety net for the unexpected.
Here are some important things to know about an Emergency Fund.
YOUR EMERGENCY FUND SHOULD BE LIQUID
What does it mean to be “liquid”? It just means it can immediately and easily be converted to cash. Emergency funds should not be invested in an asset that would take time to turn into to cash, like a home for example. While homes are great investments, they can take months to sell. The value of the home is a “non-liquid” asset and should not be considered as part of your emergency fund.
Consider putting your emergency funds in a savings account or a money market account. Money in these accounts will earn some interest, but it will be minimal. The goal of this fund is protection, it’s not growth.
CONSIDER WHAT QUALIFIES FOR AN EMERGENCY
Erika is going on a trip with her friends, and all her friends are talking about outfits they are buying. Erika realizes she has NOTHING to wear. Hello – that’s a major shopping emergency, right? WRONG!
So what counts as a true emergency? Sudden job loss is an obvious reason to have an emergency fund. You can also dip into your emergency fund to pay for things you must have to make money. For example, the computer you use for work crashes; or the car you drive to work dies. You are justified in using your emergency funds to replace those items.
If you or a loved one needs emergency medical attention, your emergency funds are there to cover just that kind of situation. Health-related emergencies or unexpected medical bills are a big reason to have this fund.
Not everything will fit neatly into the above situations. When you're faced with an unexpected expense, ask yourself: “Is it urgent?” If it is both unexpected (it couldn’t be planned for) and urgent ( it must be fixed VERY soon), using your emergency fund is justifiable.
Take a moment to write down reasons you might need an emergency fund. Here’s a hint: vacations, impulse purchases and “good deals” should NOT make the list. Just like Erika’s fashion “emergency” would not be a reason to use an emergency fund.
HOW MUCH TO SAVE
We often suggest starting by setting aside $1,000 as quickly as possible. This is commonly recommended by many finance experts. After you set aside $1,000, start working up to six months’ worth of living expenses.
Take Francesca for example. Her take-home pay after taxes and deductions is about $1,500 a month. Fifteen hundred x 6 equals $9,000. So Francesca’s Emergency Fund goal should be $9,000. If Francesca starts to earn more money, that number will increase as her money IN increases.
In some situations, saving up six months of living expenses may not be enough. If your income is not guaranteed or varies from year to year, or if your profession has a high risk of job loss, you may want to consider saving up to one year of living expenses.
GETTING STARTED
Have you heard of the phrase - “Pay yourself first?” This means that the first thing you do after getting your paycheck is to pay your future self by putting money into savings BEFORE paying bills or spending money on other expenses.
So how much should you save? If you can get to 10-15%, that’s great. For many, especially students - that’s just not possible. That’s ok! Do 1%! The amount can grow over time, the principle is what’s most important.
In order to pay yourself first, you need to know how much money you have to work with – and that means making sure you confront and get PRESENT with your MONEY.
Once you have added up your expenses and subtracted them from your income, you have an amount to pay yourself. By paying yourself first, that money will not slip through your fingers with impromptu purchases.
To make things easier, we also recommend setting up an automatic deposit into savings. Many employers even offer direct deposit and the ability to break up your paycheck into separate accounts.
There you have it! Emergency funds are useful in the case of the unexpected, which there will always be. However, they are also useful for providing peace of mind and security even in the good times. Good luck!
To learn more about bringing the MONEY program to your students, click here.
