I think it goes without saying that most people are pretty pleased with the recent performance of their portfolio. With stocks around the world continuing to push higher, recent returns have likely exceeded investor expectations. When talking about this dynamic quite a bit in our client review meetings over the last year or so. While there is no way to know how long stocks will move higher in the short term, we think now is a good time to at least double check your emergency fund to make sure you have a plan for short term cash needs just in case. Why you ask? Well, there is an old saying in the Midwest, especially around this time of year, that goes like this: “if you don’t like the weather now, wait a day because it is likely to change.” Actually, if you think about it, this advice can really be applied to many aspects of everyday life. As we all know, life can be full of surprises. It is because of these surprises, that everyone needs an emergency fund. Below are some basics of what an emergency fund is and why everyone needs one.
What is it and why do I need one?
An emergency fund is simply a defined account where you set aside funds for unforeseen expenses that may come up. Call it a rainy-day or just in case fund. In our opinion, everyone needs one because the future is always uncertain. Here are a few examples of unforeseen events in which an emergency fund can help you get by: losing your job, medical/dental emergency, costly home repairs, car issues. The list could be longer, but you probably get my point. Regardless of your situation, you should probably have some cash set aside just in case.
How much should I have in my emergency fund?
Typically, a good starting point is 3 to 12 months of normal daily living expenses. After using this range as a jumping off point, you should adjust higher or lower depending on your specific situation. Your profession, job security, income fluctuation and number of dependants should all be part of the consideration when deciding how much to have in an emergency fund. For example, there is a big difference between being an established physician versus a commission based pharmaceutical sales rep. If your income is variable, or perhaps unreliable, you might want to have a little more set aside.
How do I build one?
After you have determined how much you need, the next step is creating a plan to build it. It is a good idea to start small and work your way into it. You might want to calculate how much you will need to save and over what time period in order to get to your number. Then consider allocating a portion of your paycheck each pay period to a separate, emergency fund only account. You can typically setup automatic transfers from your checking account to your emergency fund right after you get paid. Whatever you do, make it automatic as it will be much easier to stay the course. If you receive a bonus or other income from your employer, you might save a large portion of that as well. Just keep in mind, it will likely take time to get to your goal.
Where is the best place to have one?
To start, your emergency fund should always be completely liquid and (important) not be subject to any investment risk. An FDIC insurance Savings or Money Market account is usually a good place to have one. Personally, I like online banks for an emergency fund. Some examples would be: Ally Bank: https://www.ally.com or Capital One: https://www.capitalone.com/. However, if you prefer more of a local feel, any bank will work, just make sure you are earning at least a market rate of interest. A good way to determine if an interest rate is decent, compare it to Ally and Capital One or just google savings rates in your area. It usually pays to shop around.
We have had some great questions from clients this month. Below are three that we thought were worthy to share.
1) I heard that Social Security payments will increase in 2018, is that true?
Yes, what you heard is true. About a month ago the Social Security administration announced that Social Security and Supplement Security Income (SSI) beneficiaries will receive a 2% cost of living increase in 2018. The official release can be found here: https://www.ssa.gov/news/press/factsheets/colafacts2018.pdf. The increase is important, because as many as 42 million American’s rely on Social Security for some of their income. The annual benefit increase, while nice, can also be a little misleading. One issue that many people face is the increase is not big enough to offset the increased cost of Medicare Part B premiums and other health related expenses in retirement. Nevertheless, an increase is an increase and the 2% bump is the largest increase in six years. Our advice is to take it while you can get it.
2) I find that I have a hard time controlling my spending. What are some tips in creating a budget?
To reduce your spending, you first need to find out where your money goes each month. This is why creating a budget is an important first step to control spending. Creating a budget can be a daunting task. You first should consider if you want to use software or apps like www.mint.com or www.budgettracker.com. There are also many other good choices available online or via most smart phone apps. We highly suggest that you leverage technology when creating a budget. However, if you prefer to do it the old-fashioned way we suggest that you start out by keeping track of all of your expenses for a month. No expense is too small or insignificant as they will all add up. Next, categorize the expenses so you can see what you spend and where you spend it. Once you have your spending by category, analyze your spending to determine what is non- discretionary (fixed) and what is variable. From there develop a plan to lower your overall spending in areas that can be trimmed. Keep in mind that even small changes can add up to big numbers over longer periods of time. Give yourself some time to get used to your new spending habits. Remember, Rome wasn’t built in a day either.
3) What is the best way to calculate my net worth?
Calculating your net worth is an important part of the overall planning process. In its simplest form, a person’s net worth is the amount by which their assets exceed their liabilities. The best way to calculate your net worth is to create a spreadsheet listing your assets as a positive and your liabilities (debts) as a negative. The net result will be your net worth. Assets can include cash, checking/savings accounts, certificates of deposit (CDs), mutual funds, stocks, bonds, IRAs, 401(k) plans, automobiles, and real estate. Liabilities can include debt from credit cards, student loans, mortgages, home equity loans, 401(k) loans, and car loans. Once you calculate your net worth you will know exactly what you own and what you owe. Keep in mind that your net worth will constantly change, depending on a variety of factors. It is a good idea to calculate your net worth at least annually. Sometimes knowing where you stand will help you create a plan to get to where you want to be.
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