Building your emergency fund

Strategic Wealth

The COVID-19 pandemic emphasized the importance of having an emergency fund to fall back on. It can give you a sense of security and allow you to recover from an unexpected financial burden. But how much should you have saved? Independent financial advisor Mike Reeves of Strategic Wealth Designers joined the newscast to discuss emergency funds. Reeves says everyone should work on building an emergency fund.

“We can think of three levels of savers,” Reeves says. “The young saver, those in the middle of the road, and the pre-retirees or retirees. The young saver is in accumulation mode and has a lot of time until retirement. Those in the middle of the road are generally in their highest income earning years, typically between 30s, 40s, and 50s. And the last group is 5-10 years out from retirement or retired.”

For young savers, the general rule of thumb of saving 6 months of expenses is overwhelming. Instead what they should focus on is saving what they can. Young savers can use the 70/20/10 rule in which 70% of their income is used for living expenses, 20% is put towards debt, and 10% is used to save in a 401(k) and for their emergency fund.

“For those that are in the middle of the road, 6 months to a year is a good idea,” Reeves says. “At this point you want to plan for the worst and hope for the best. And ideally you want to be saving 15-20% of your income. In the final group, I’d recommend having closer to a year of expenses in an emergency fund. You want this to be in cash or investments you can readily use so you aren’t depleting your retirement savings.”

Exceptions to needing a year of expenses in an emergency fund could occur. For instance, if you are taking Social Security, have a pension, or making rental income, you may not need as large of a fund. To see additional stories surrounding business and economic news for the Indianapolis area, visit https://CBS4Indy.com/Strategic-Wealth and if you have a question for Mike send an email to info@swdgroup.com

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