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Coronavirus Crisis and Financial Planning: The Importance of Building Emergency Savings

emergency savings

The coronavirus crisis is causing massive financial upheaval for many individuals and families due to job losses or severely reduced hours. Over 700,000 jobs were lost in March, according to the Department of Labor, representing the largest monthly decline in payrolls since 2009 during the Great Recession.

Our current financial disruption is a good reminder of the importance of building an emergency savings fund you can easily tap during times of financial distress. Having access to liquid savings can lower financial stress for many families during times like we’re facing now.

How Much Should You Save?

Every family’s situation is different, but many financial experts recommend saving between three and six months’ worth of living expenses in case of a financial emergency like a job loss or significant reduction in income. These funds can also be tapped for other unexpected expenses like major home or car repairs or out-of-pocket medical expenses. 

The Certified Financial Planner Board of Standards offers the following guidelines with regard to building an emergency savings fund:

  • Single earner households — Save at least six months’ worth of living expenses.
  • Dual earner households — Save at least three months’ worth of living expenses.
  • Single earner household with a second source of sizeable income — Save at least three months’ worth of living expenses.

Keep in mind that living expenses include both fixed and variable expenses. For example, your mortgage or rent, insurance and car payments are probably the same amount each month, but your utilities, groceries and entertainment expenses may vary from month to month. 

As you calculate your living expenses, include everything that goes into maintaining your lifestyle. However, you might want to leave out retirement account contributions since these can probably be suspended, if necessary, during financial emergencies. It’s also usually smart to trim variable expenses like entertainment and eating out when figuring an emergency budget.

Working Toward a Goal

Figuring out how much money you need to save according to these guidelines and arriving at a target number can give you a concrete goal to work toward for building your emergency savings account. For many people, this is more effective than just putting aside extra money here or there when you might have it.

For example, let’s say you’re a dual earner household with monthly expenses of $5,000 so your goal is to build an emergency savings fund of $15,000. Depending on your income, you may not be able to do this quickly, but you could set a goal of reaching this level of savings in two years. Doing so would require you to save $625 per month. 

If that’s not realistic, you could reach your goal in three years by saving $417 per month. Putting extra lump sums into your savings account, like bonuses or tax refunds, could help you reach your savings goal even faster.

Automate Your Savings

Of course, saving this much money will require some discipline. One strategy is to automate your savings by having funds transferred directly from your checking account into your savings account each month. Or you could check with your employer to see if some of your pay can be direct deposited into your savings account just like it is into your retirement account. This way, the money is “out of sight, out of mind,” which makes it less tempting to spend rather than save it.

So where should you keep your emergency savings funds? Most experts recommend opening a no-fee, high-yield savings or money market account with your bank or an online financial institution. The most important factor is that the funds be accessible at any time without penalty. While you probably won’t earn a high rate of interest on your emergency savings, you won’t be assuming much risk, either.

Important note: Online banks usually limit the number of withdrawals that can be made each month from money market accounts. So keep this in mind as you plan your emergency savings and withdrawals strategies.

Don’t Wait — Get Started Now

If you haven’t begun building an emergency savings account yet, don’t be discouraged. It’s never too late to get started. Crunch some numbers to arrive at a savings goal and then devise a strategy to get there in a realistic period of time.

Doing so will give you additional confidence and peace of mind that you’ll be better prepared the next time a major financial disruption occurs.

Please contact us if you have more questions about building an emergency savings fund or any other aspect of financial planning during the coronavirus crisis.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.