According to the Financial Industry Regulatory Authority, only 46% of Americans have a rainy day fund, meaning that 54% of Americans could be at an unforeseen emergency of financial insecurity. If you are an investor, you may not think this statistic applies to you. After all, if you needed quick cash, you could simply sell your shares.
You might be tempted to organize your assets so that they play a dual role, which means you invest the money to save for your future, but that same money also acts as a safety net in case of an emergency. financial emergency. However, building your rainy day fund using this approach exclusively comes with its own risks, including brokerage fees, unexpected market volatility, and potential liquidity issues.
Nothing beats a good old-fashioned emergency savings account, especially if your investments are in danger of being liquidated to cover the cost of job loss, extended unpaid leave to care for a sick relative or even a surprisingly high tax bill. .
Here are five tips for establishing an emergency fund to protect your assets and long-term financial security.
Track your expenses. First of all. If you’re not tracking your monthly expenses, you need to start. There are many popular online aggregation programs that can help individuals and families manage a budget and see where their money is going each month. Finding areas and ways to save is impossible if you don’t have a clear understanding of your finances, so an expense assessment and a written budget are steps one and two in this process.
Maximize what you have. Now consider maximizing what you have. It’s a good idea to keep emergency savings separate from other accounts, so if there’s a small amount of money in your checking or savings account, consider moving some or all of that money into an interest-bearing account, such as federally insured money. market account or certificate of deposit.
If you don’t have the money to build a short-term, self-contained emergency fund and you’ve reached your employer’s maximum, consider making additional contributions to your employer-sponsored plan in the form of dollars after tax. . The money will be waiting for you when you stop working if you never use it on a rainy day. But, your capital is accessible at any time without early withdrawal penalty fees in case of emergency. Also, it’s generally prudent to have the ability to withdraw money before and after tax in retirement.
If your employer doesn’t offer the option of contributing after-tax dollars for retirement, a Roth IRA is another option. With a Roth IRA, you can withdraw your principal at any time without penalty, with taxes and fees on income only.
Invest prudently. If you decide to invest part of your emergency fund, consider non-volatile and liquid vehicles. Given the unexpected nature of most emergencies, it’s important that you have quick access to cash that you know will be there for you when you need it. You want to look for investments that earn interest and will be readily available if you need to withdraw quickly.
Take one step at a time. Consider scheduling small investments on a daily, weekly, or monthly basis. This will help you build a large emergency fund with minimal impact on your daily budget. By using online services and apps like Acorns, which automatically round up your purchases and invest the difference, those small amounts will add up before you know it.
Turn your expenses into savings. As debts such as car loans, student loans, and credit card balances are paid off, consider redirecting those funds to emergency savings using an automated transfer (available in most banks) from your current account to your savings. You might want the transfer to happen shortly after your paycheck is deposited each period, so you stay accustomed to living on the previously smaller budget.
As Warren Buffett once said, “Don’t save what’s left after you’ve spent. Spend what’s left after saving.
Keep in mind that your personality and other behavioral characteristics come into play in emergency savings just as they do in your investment strategy.
Some people can’t sleep at night if they don’t have six months of expenses in the bank, and others are content with one month. Some will feel satisfied seeing a lump sum grow over time with interest, while others will be more motivated if they see that money growing faster with additional savings each month.
Whatever your goal, start small and build on your success. There’s no downside to growing your savings, and there are plenty of upsides — both financially and emotionally — to having all your bases covered.
Disclosures: Investment Advisor Representative and Registered Representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (Member SIPC). This information is provided by Voya solely for your training. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making any tax-related investment/insurance decision.