For the most part, human beings are positive creatures—sometimes to a fault.
A 2011 study done by ScienceDirect found that 80 percent of people display what’s called an optimism bias. The study states that, “when it comes to predicting what will happen to us tomorrow, next week, or fifty years from now, we overestimate the likelihood of positive events, and underestimate the likelihood of negative events.”
While a positive attitude can be an asset in many parts of life, it can actually hurt your finances over the long haul. Envisioning your future through rose-colored glasses can mean you aren’t saving for the possibility of a natural disaster, a medical emergency or a job loss, which can put you and your family in a bad situation should something happen.
I’ve put together a list of ways to kick start your emergency fund so you’re prepared for the worst, even if you’re sure it won’t happen to you.
Know What You Need
The rule of thumb for emergency savings is to be able to cover six months of living expenses (not to be confused with income). So first things first, sit down and figure out what the number is. Tally up the mortgage, utilities, insurance, food and necessities for a six-month period. That’s your target savings goal.
Now, set a goal for how much you’ll set aside each month. This amount should be manageable, but enough that your goal is achievable.
Use Direct Deposit to Get Started
Almost everyone these days gets their paychecks via direct deposit. Instead of pulling money out of your account every month, set up a new savings account and route a small portion of your paycheck directly into it. This way, you won’t be tempted to skip contributions and it’ll make it more difficult to spend that money on other things.
If you don’t have direct deposit or don’t want to change your current setup, another option is to set up a recurring transfer with your bank. Then you still have the benefit of money moving over automatically if direct deposit isn’t an option.
Save, Save, Save
Whether it’s adding up pocket change or saving your tax refund instead of spending it, the more sources you can find to add to your emergency fund the better. Taking on some part-time work or keeping a closer eye on your cell phone and cable bills could also help to stock up for unforeseen situations.
Keep It Liquid
Your emergency savings fund should be ready to access quickly if something happens to you or your family. For that reason, stocks, bonds and other long-term investments are not ideal options for emergency funds. Consider setting up a separate savings account that will accrue some interest, but is still easily accessible.
If you’re sure not sure how, or how much, to save, I highly recommend talking with a financial professional to make sure you’re prepared for whatever life has in store.
This article was first published on 10/10/2017 in the Des Moines Register.
CFP®, MBA, Series 7 Securities Registration,1 Series 66 Advisory Registration, † Life & Health Insurance License As a CERTIFIED FINANCIAL PLANNER™ professional, Jim brings an extensive retirement income planning background to the team. He regularly writes a personal finance column for The Des Moines Register’s Business...Read More