Saving for a rainy day is one of the most important financial decisions you’ll ever make. And when the time comes to cash out, you’ll be happy you did. Otherwise, without an emergency cash reserve, unexpected costs like a leaky roof or broken furnace can easily drain checking and retirement accounts, and likely pile on more debt. Whether it’s a job layoff or a winter weather emergency, there are steps you can take to ensure your rainy-day fund keeps you covered.
Set a savings goal
When it comes to putting money aside for that rainy day, financial experts recommend
saving three to six months of basic living expenses. That goal will undoubtedly take time to reach, so break it down into smaller, more manageable targets. Start with a plan to save $250 to $500 over the course of several months. Once you’ve hit that goal, repeat. Then consider adding a small buffer to allow for an unexpected expense, like a healthcare bill.
Along the way, track your spending and revisit your intentions. Check the iTunes and Google Play stores for mobile device apps, or use personal or cloud-based budgeting software to help you stay focused. You can also sign up for Compass, LGFCU’s online financial management, tool to help you stay focused. It is important to be 100 percent comfortable with your decision to save. This way you’ll be more likely to stick to your budget and stay on track to meet your goal.
Don’t borrow trouble
Even if you’re in a pinch, try hard to avoid borrowing against retirement accounts and credit cards. For example, if you withdraw money from an individual retirement account (IRA) such as a 401(k) or other qualified retirement plan, before reaching the age of 59 ½, you could be subject to a 10 percent penalty for early distribution. Ask your tax advisor for specifics about potential taxes and fees, and about staying committed to retirement goals.
Another tempting option at your fingertips is a credit card cash advance. While easy to access, credit card loans can go hand-in-hand with high interest rates. This approach could significantly increase your debt load as you attempt to pay back the advance.
Instead of increasing your debt with credit card borrowing or emptying your retirement account, check your eligibility for a personal loan, home equity line of credit (HELOC) or other loan program from your Credit Union, which will likely have more affordable rates.
Pinch a few pennies
Consider setting aside a portion of each paycheck — maybe $25 — and have it directly deposited into your designated LGFCU Checking, Share or Money Market account.
Look for small nips and tucks to save in your monthly budget (and increase your emergency fund) such as preparing meals and making coffee at home instead of eating out or visiting a coffeehouse. Next, make a list before grocery shopping to control impulse spending. Seek a rate reduction from creditors and pay off credit card debt. Making minimum payments on $1,000 at 20 percent interest costs you $200 each year. Consider a debt consolidation loan.
Out of sight and out of mind is a good rule of thumb for saving. In addition to personal accounts, you can park your cash in short-term savings vehicles like certificates of deposits (CDs) — what credit unions call share term certificates — fixed-rate, closed-end deposits. When it comes to saving, you may never miss the money you don’t see. Plus these options earn dividends on your behalf.
Use your savings, if necessary
An emergency fund is just what you need to weather a crisis. Be clear, however, on what constitutes an emergency. Large car repairs, appliance repair or replacement, and loss of employment, for example, all qualify. Resist the temptation to splurge when it’s unnecessary and honor the intended purpose of your fund.
However, when emergencies do arise remember to use your savings. Don’t sink yourself into debt when you have the cash available. You should choose to rebuild emergency savings instead of incurring debt and paying high interest.