Safety Net

Life is full of unexpected events. Getting sent to the hospital, a tree damaging your house, totaling your car, being laid off from a job — calamities like these have a high price tag. We can’t control when catastrophe strikes, but we can be prepared, especially with our finances.

Setting aside an emergency fund can soften the blow. Regardless of income or net worth, an emergency fund is a universal need. 

“Unexpected things happen to everyone — that doesn’t discriminate,” says Frank Bevilacqua II, president and CEO of W3 Wealth Management in Fairlawn. 

He recommends putting enough aside to cover three to six months of expenses. That’s the general amount of time it might take to find another job or otherwise rally from an emergency. It’s enough of a cushion to give you peace of mind.

“It’s really going to help lower the stress in your life knowing that if something unexpected does come up that you have that there to fall back onto,” he says.

He walks us through the basics of saving for the unthinkable.

Keep Hands Off

The first rule of emergency funds is that they are only used for exactly that. And no, buying a new couch or whisking off to the Caribbean doesn’t count as an emergency. 

“It’s truly something that was 100 percent unexpected and you need access to quick cash,” he says. “You’re not touching it for anything other than that.”

Squirreling away a lump of cash while you have other savings goals and expenses takes a lot of discipline, but Bevilacqua says it’s about avoiding debt and staying on track with the life you worked so hard for. 

“People who don’t have [one] could end up making poor financial decisions because they’re trying to come up with money they didn’t have for emergencies,” he says.

Pick a Number

To decide how much money to save up, Bevilacqua says to simply multiply your monthly income by three. “That’s what you should have as a minimum; some people like to have more,” he says. Again, it should be enough to cover a minimum of three months and up to six months of expenses.

To work toward that target amount, write up a solid budget that ensures you are saving rather than just spending and paying bills.

“Pick a dollar amount each month that you set aside in savings, and have it be the first thing you do,” he says. Some employers let you automatically defer a portion of your pay to savings accounts, making it easier because you never have that cash in your hands.

Though the goal number is a personal decision, Bevilacqua says it’s ideal to work toward targeting 15 to 20 percent of total income for savings each month. “But I try not to focus on what percent as much as slowly building it up,” he adds.

Two strategies he suggests for building the fund involve capitalizing on happier unexpected events, like bonus checks and pay raises.

If you come into a bonus from work, a gift or an inheritance, divvy it up to make saving more palatable. “Divide it in three,” Bevilacqua says. “Take one third and put it into savings. Take one third and pay down debt. And take the other third and have fun with it.”

If you get a yearly raise, Bevilacqua suggests the same strategy. Continue living on your pre-raise salary and put a portion of the raise amount toward your emergency fund savings and a portion into a 401(k) or other long-term savings account.

The raise strategy can work for people at any level of income, Bevilacqua says, but those truly living paycheck to paycheck might want to consider taking on an additional part-time job to build their emergency fund. 

“It’s hard to do, but you have to prioritize and pay yourself first,” he says.

Make It Work

An emergency fund has to be invested in a way that you can access quickly. 

“You want it to be liquid so you can get to it at a moment’s notice, the next day if you need to,” Bevilacqua says.

That means savings accounts trump longer term savings vehicles like certificates of deposit (also known as CDs) because, even though they often pay higher interest rates, they must mature for a specified period, and you’ll pay a penalty for withdrawing early.  

Research online and local banks to find which is offering the best rate of interest and create a dedicated savings account just for your emergency fund. Bevilacqua says the bank where you keep all your accounts can work fine for those with the force of will to keep their hands off it. 

“Some people are more disciplined than others,” he says. “If you’re one of those people who are more likely to see it there and go spend it, put it at a different banking institution so it’s not something you see on a daily basis.”

Pay the Bills

When surprises arise, your emergency fund should be ready to deploy. If it covers the expenses, great! It worked! But if the emergency exceeds the amount you have saved or you hadn’t built it all up when the mishap struck, stay calm and make your next moves carefully. You might be tempted to use a credit card to cover it, but Bevilacqua counsels caution.

“Debt should always be the last resort,” he says. 

Drain savings first, then if you have an option, do a loan on a 401(k) or other savings vehicle. Bevilacqua says do what’s necessary to avoid debt. Some 401(k) plans allow loans of up to half the account’s balance with a cap of $50,000. But it has to be paid back with interest in five years or less. “The benefit is you’re paying yourself interest; the disadvantage is it’s coming out of your paycheck, so your income is going to be lower until it’s paid off,” he says.

If debt is the only way to accommodate an emergency, Bevilacqua advises shopping for debt with the lowest rate of interest. “If it’s a credit card with zero percent interest, that’s a way to go. Just make sure you pay it off as quickly as you can.”

When you finally send off your last bill and the day has been saved, it’s not break time. It’s time to get right back to growing your emergency fund again. You might want to raise the target number if the fund wasn’t enough. It’s a tough cycle, but remember that having a little aside can save you a lot of debt later and ease your mind. 

 “Once you use it, the first thing you should do is rebuild it back to where you had it,” Bevilacqua says. “You want to always know it’s there.”