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Your Emergency Fund

Here’s another article from our archives that seems especially timely, as many investors are wondering whether the latest quarter of negative growth (-0.9%) following the contraction in the first quarter of 2022 (-1.6%) means that we are “officially” in a recession (by the way, there is no “official” definition, and other factors in the economy, such as low unemployment and strong corporate earnings, are not typically indicative of recession). Others, seeing the recent uptrend in the stock market (the S&P 500 is up more than 12% from its lows in mid-June), are trying to decide whether this is merely a bear market rally that is destined to fade, or the beginnings of the next bull market.

In uncertain times—and when you think about it, aren’t all times uncertain, to some degree?—it’s always good to be prepared for the proverbial “rainy day,” and for most individuals, that means making sure that their “rainy day fund” is adequately funded. Fans of the novels and the recent hit HBO series Game of Thrones are familiar with the motto of the House of Stark: “Winter is coming.” This clan lives in the far north of author George R. R. Martin’s fictional land of Westeros, and their family proverb underlines their belief that it is always important to be prepared for hard times. Though your hard times aren’t likely to involve sword fights and sieges, it is certainly possible that you could encounter some rough financial weather from time to time. A shifting economy can precipitate unexpected layoffs. On an even more personal, “micro-economic” level, an illness or accident can happen, preventing you from working for a lengthy period; an unforeseen, major car repair can knock a hole in your budget.

For all of these reasons, an emergency fund should be a basic component of your overall financial plan. And yet, according to a January 2022 survey by Bankrate.com, 56% of Americans say they couldn’t cover a $1,000 emergency expense from savings. It is worth noting that the 44% who could cover such an expense without resorting to credit cards or other means represents a substantial increase over previous years; this may be due to the shocks of the 2020 pandemic and the ways it forced many of us to re-think our spending and saving priorities. But the fact remains that the majority of Americans don’t have the recommended six months of income—the level recommended by most financial planners—set aside to cover unexpected hard times.

If you fall into the “little or none” category of emergency savings, don’t despair! There’s no time like the present to get started. Remember, six months’ worth of savings is your goal. Even if you’re not there yet, you can still make progress. Here are some steps to find those extra dollars to start building up your emergency fund.

  1. Set a monthly goal, even if it’s modest. “The journey of a thousand miles begins with a single step,” and if you train yourself to keep taking steps, you’ll eventually get where you’re going.

  2. Instead of buying a coffee on your way to work, put $3.00 a day (or $21 per week, if you prefer) into your emergency fund account. Look for other small ways to save on your daily routine: dine out one less night per week; cancel your gym membership and start jogging or working out at home; downgrade your cellular service; drop the premium cable package. Most of us have at least some “fat” in our budgets that can be trimmed and repurposed to savings.

  3. Put “surprise” money in your emergency fund. Tax refunds, bonuses, extra cash flow from paid-off debt; garage sale proceeds; gifts from your rich uncle… Any time you “find” some money unexpectedly, put it in your emergency fund. Over time, it really adds up.

  4. Keep your emergency fund liquid, but not too available. If you have an emergency, you’ll need to access the funds, but you don’t want them too handy, tempting you to dip into them for non-emergency purposes. A savings account attached to your checking account is good. An online savings account also works, because you have to think about it before you withdraw money.

Longfellow said it long ago: “Into each life some rain must fall.” Stormy weather is inevitable. But if you’re prepared, you’re much less likely to get drenched. At Bernhardt Wealth Management, we understand the importance of hoping for the best, while planning for the worst. Our fiduciary guidance helps our clients make smart preparation for the inevitable ups and downs in the economy and the markets. To learn more, click here to read our recent article, “The Fed, the Economy, and the Financial Markets.” And be sure to return to our blog tomorrow to read our article titled "Is It a Recession? Or is the Economy Just in a Bad Mood?"

Buen Camino!

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