For Peace of Mind, Create an Emergency Fund

The following article was recently released by the MSCPA.

Coins and Skeleton KeyYour car breaks down and you need repairs immediately. You or a loved one has a medical problem and there are related expenses that aren’t covered by insurance. Or, you can’t work temporarily because of an illness or injury.

Do you have enough money available to pay for unforeseen expenses in a crisis? The best way to make sure you do is to set up an emergency fund that you can tap into when the unexpected happens, according to the Massachusetts Society of CPAs.

Start Small
To get off to a good start, don’t get overwhelmed by the idea of creating a fund to cover all your expenses for any contingency. Instead, pick a reasonable amount that is manageable for you to set aside every week.

Establish A Regular Saving Schedule
Stick to your regular deposits. If you save as little as $5 a week, you’ll be amazed at how quickly cash can add up once saving becomes a routine. If you do need to tap into the emergency fund, remember to pay yourself back. You can do that by increasing the amount you save each week until you have replenished the account. If that works, try to keep saving at that higher level as long as your budget allows.

Set A Realistic Goal
How much money should there be in your emergency fund? Experts recommend that you have from three to six months of expenses in reserve just in case you lose your job. If that sounds impossible, don’t be discouraged. The most important step is starting with small but steady deposits. Pick a small goal-—maybe $500 or $1,000-—and aim to have that much by a certain date. Once you’ve achieved that, set a new goal. If saving six months’ worth of expenses sounds impossible, then aim to save enough for several months’ worth of expenses.

Limit Access
You should be able to access your emergency cash readily when a crisis occurs, but if the money is too easy to get, you may end up using it for unintended purposes. Don’t accumulate the money in your checking account, for example, where it can easily be siphoned off for everyday expenses. Instead, open a separate interest-bearing savings account for your emergency dollars, and resolve to leave them untouched until you really need them.

Define “Emergency”
Determine what you mean by “emergency” and stick to your definition. For example, you may decide you’ll only use the money for medical emergencies, if someone in the family loses a job or is unable to work or in the event of an accident or disaster. Establish in advance that finding a great deal on a beach vacation is not an “emergency.” You can always set up another “splurge fund” where you save money for indulgences.

Don’t Fall Back On Your Credit Cards
Many people use their credit cards to pay for necessities in a crisis, but this is a costly way to cover your needs. You will have to pay interest on the debt rather than earn interest on your emergency cash in an interest-bearing account.

Work With Your CPA
No matter what goal you choose, creating a plan and sticking to it are the best ways to get there.  For advice on these and other financial questions, contact us at 508-830-0007.

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About cozbycpa

Heather L. Cozby is a CPA on the South Shore and Cape Cod. The managing partner of Cozby & Company, LLC, Heather has the resources and experience necessary to provide quality professional services on a timely basis and at a reasonable cost. She specializes in tax planning & preparation; audit, review & compilation services; management advisory services; bookkeeping; and accounting. Her unique niche is in working with homeowners’ associations and condominium trusts, advising with rental real estate, and providing outsourced financial consulting for mid-sized companies. She is more entrepreneurial than most accountants, and offers the best of both worlds - providing the services of a larger firm while retaining the ability to connect with her clients on a personal level.
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