When compared to other developed countries, the personal savings rate in the United States is dismal. A Google Consumer Survey conducted in 2016 determined that less than 70 percent of Americans set money aside in a savings account or under their mattresses. Moreover, 60 percent only have about $1,000 saved up. Considering the cost of living in many states, a thousand dollars may not qualify as an adequate emergency fund.
Trusted financial advisor Jan Gleisner defines an emergency fund as enough liquid assets to cover three months of household expenses. This fund, which is also known as a cash reserve, must be fully accessible in case of emergencies and should be reviewed periodically in case money needs to be added to account for inflation. Here are the top reasons you should have an emergency fund.
1. Prevent Stress
The peace of mind a nice cash reserve can bring is invaluable. Financial stress is one of the worst feelings in the world. Do not assume being single will shield you from financial stress during difficult times. Socioeconomic research has shown that families are better at handling this type of stress since they can weather the storm together.
2. Cover Costs During a Sudden Loss of Income
Even though the U.S. unemployment rate is at historically low records, job stability is still elusive. Layoffs and terminations are still very active, and it is not unusual for workers to go through a few jobs each year. You do not have to be laid off or fired to tap into your emergency fund. If you feel you need a few weeks to look for a better job, your cash reserves can help you reach this goal.
3. Encourage Yourself to Save for Other Purposes
When you build three months of cash reserves, you will pick up valuable habits that allow you to increase savings or even think about investing. If you were forced to cut down on expenses to build your emergency fund, you will be better prepared to do so again when setting up a savings account or seeking investments such as bonds or mutual funds.
4. Stay Away from Credit Cards
Using credit cards in an emergency is the main culprit behind the deficient rate of personal savings in the United States. Even though you are supposed to guard your emergency fund with religious zeal, you should use it to cover a reasonable expense instead of reaching into your wallet or purse for a credit card, which will only force you to go deeper into debt.
5. Be Prepared in Case of a Natural Disaster
Never assume a high-paying job will exempt you from the harsh reality of an emergency. Think about the record number of natural disasters that struck the U.S. over the last two years. Hurricanes, winter storms, tornadoes, and wildfires can strike at any moment, and they tend to happen at the worst time in terms of personal finance.
If you’re having difficulty saving money for an emergency fund, you may need the assistance of a personal financial advisor. San Diego, CA, residents can place their trust in Jan Gleisner. Reach out today to find out how Jan Gleisner can help you reach your financial goals.