How to Prepare for a Financial Safety Plan
May 2, 2023 | Sage Capone
Most Americans work paycheck to paycheck and never plan for an emergency. Life can throw you many curveballs and it’s important to be prepared. A financial safety fund helps you weather storms whether you incur a job loss or unforeseen expenses like home and car repairs. So, the question is how much should someone save?
Statistically, on average most Americans can incur an emergency expense of around $2,000. These studies were conducted by LendingClub and Bankrate. Believe it or not the most hard hit with unforeseen expenses are middle aged and high-income consumers. Of course, this is your typical emergency expense but what can lead us to financial ruin?
Sadly, the most common cause of financial ruin isn’t just a car expense but it is health related causes. In fact, it is reported in the American Journal of Public Health that 66.5% of bankruptcies were tied to hospitalizations. Not necessarily hospital expenses but commonly Americans tend to file after they have been hospitalized. On average, this group is the lower income bracket that falls into the category of filing for bankruptcy due to medical debt.
This leads us back to the question; how much is savings is enough for an emergency fund? The answer is a reflection of your personal situation and income stability. The general rule would be to prepare for at least 3 – 6 months’ worth of emergency allowance for expenses. Your emergency fund should take into consideration whether you have predictable income or are self-employed with unpredictable income. In this case, you might want to save more for an emergency. Many factors are considered for planning your emergency fund like personal debt, risk factor and health insurance. All these things should be taken into account while setting up your fund.
Now let’s talk about how we can build an emergency fund. The number one best way to build an emergency fund is save, save, save. I’m sure this is easier said than done but this will allow you to put some money aside. Helpful tips in saving are setting up a budget to see exactly where or what you are spending money on. Once you set up a budget you can see where you can cut out certain expenses. Lastly, set up an automated system to pay yourself first so you don’t end up spending your money.
Once you set up this game plan and start accumulating a savings, you need to plan where to keep your money. The best way is to keep it in low-risk accounts that still offer yields on your cash holdings. One safe area would be a Money Market account that is FDIC-insured with as much as 4% yield on your deposit. There are some restrictions on withdrawing your money but this money is put aside for emergency anyway so it should be fine. Another option are Money Market funds. These are not FDIC-insured and must be handled through a brokerage firm. These funds tend to provide a higher yield on your cash holdings but keep in mind the value of your money will fluctuate if interest rates change in the future.
As you can see, preparedness is the best form of financial security for the future. We really can’t predict life’s outcomes or unexpected expenses, but we can prepare for it.
As always, please do not hesitate to contact Sage Financial Investments for a Free Strategy Review or Second Opinion to discuss your portfolio or re-visit your risk profile.
*Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. Investments and/or investment strategies involve risk including the possible loss of principal. For a complete description of investment risks, fees and services, review the Brookstone Capital Management firm brochure (ADV Part 2A) which is available from your Investment Advisor Representative or by contacting Brookstone Capital Management.