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3 Stages of Emergency Funds

When it comes to how much you should save up in your emergency fund, there’s all kinds of advice available out there about this topic. We’re not going to waste either of our time – go ahead and Google it! I guarantee you that, based on that search and how conservative you are or aren’t, the answer to that question is going to be different. That’s the beauty of Google – they learn the personality of the person searching and give you the information you want to hear. 

I know, I know – you’re thinking, “But really Dave, how much do I need to save?” First, ask yourself, is your income steady each month or is it more volatile, such as a commission-based sales job? Depending on your situation, you’ll need more or less in an emergency fund. Are you and your spouse both working? What are your total bills each month? All of these factors should be considered when determining your unique number. Of course our team can help you settle on a goal if you’re having trouble coming up with the right amount for you and your family.

Once you have established the number you’re comfortable with, there are a few stages you’ll go through. Right off the bat, you may be thinking, “OMG that number is so high!” Here’s where automation comes in. Determine the amount you want to contribute each month as you work towards the overall goal, and then “set it & forget it.” Automating those transfers makes it less painful to part with that money every month, and reduces the likelihood that you’ll forget to make the payment, or decide to make a smaller contribution “just this once.” Trust me – with auto drafts, you only have to make the decision one time, and then you can simply watch the balance go up. 

Next, you’ve been diligent for however long it took to reach your goal, and now your emergency fund is fully stocked. Treat yourself! Seriously. Take the next auto payment and take your spouse out for a fancy meal, or take the kids on a fun weekend outing, or buy that shiny new gadget you’ve been eyeing. Whatever it is, I believe it’s important to reward yourself for meeting a goal. The month after that, continue those auto drafts and continue to make fun memories with your loved ones as that surplus builds. Planning a vacation for next summer? Use your emergency fund surplus! I have practiced this approach for years, and some of my favorite family memories were funded with excess dollars from my emergency fund. 

Of course, eventually you will need to tap into that safety net. HVAC on the fritz? That’s why you maintained your discipline and built up this fund in the first place. You can cover the costs of repairs or replacement without turning to a credit card, or making an already-stressful situation that much worse. 

What other goals do you have above and beyond your emergency fund? Once that’s fully funded, let us know and we can look into a Roth IRA, college savings for your kids or grandkids, or other savings vehicles that work with your life goals. Give us a call. 

Article by David Smyth, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.

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