Creating an Emergency Fund

As a financial counselor, I often repeat the advice to my clients to save at least eight months of their living expenses in case of an emergency such as a job loss. For my younger clients, I recommend that they build an emergency fund by following a series of small, attainable goals. Following these steps allows my clients to work towards financial stability while still making progress on their loan obligations. In addition, each goal gives them a feeling of better security since they are able to see which types of emergencies they are prepared to handle, and which ones they aren’t protected against.

A lot of young people today start out their adult lives with a substantial amount of debt from student loans and credit cards.  When they land their first professional job, their immediate financial goals focus on paying off this debt while still paying their bills.  By creating a budget that puts everything towards paying off loans, however, they are neglecting to protect themselves against a catastrophic or even minor event that can add more to their debt.

As a financial counselor, I often repeat the advice to my clients to save at least eight months of their living expenses in case of an emergency such as a job loss.  While many older people usually have money set aside somewhere, many of the young people I see have just started out on their own and don’t have anything saved.  In addition, when reviewing their budgets, many of them simply cannot free up more than 10% of their net salary to put towards any kind of savings account thanks to early financial mistakes or student loans.  When you consider that this means about 90% of their net income goes towards their living expenses; creating an eight month emergency fund means putting aside 60% of their annual salary.  If they can save 10% of their salary a month, it would take them six years to amass that amount of money, assuming nothing happened in that amount of time to cause them to pull money out.

For my younger clients, I recommend that they build an emergency fund by following a series of small, attainable goals.  Following these steps allows my clients to work towards financial stability while still making progress on their loan obligations.  In addition, each goal gives them a feeling of better security since they are able to see which types of emergencies they are prepared to handle, and which ones they aren’t protected against.

Save $100 in your checking account.  I advise many people who have had difficulties with bouncing checks or debit card charges that went through despite of there being insufficient funds in their accounts.  Often, these charges are for amounts less than $10, but the accompanying overdraft charges can be higher than $25.  Putting $100 into their checking account, then subtracting the amount from their check ledger as “emergency fund”  or “overdraft protection” takes care of these overages without having to pay the overdraft fees.  Of course, this only works if clients keep check ledgers.

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  1. thanks for sharing, when you are jobless however this is hard to do.

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