It has always been a wise precaution to stash money away for a rainy day — much less a pandemic.
Now some — or many — of us may be tapping into those emergency funds to manage during these unprecedented times.
But even during a pandemic, it is important to create or to continue contributing to an existing emergency fund, according to Shawnee’s Bank of Labor senior vice president and manager of commercial banking Joseph Keller.
As part of its ongoing financial series, The Leaven asked Keller for key tips in preparing for a financial emergency.
Q. What is an emergency fund?
A. An emergency fund is a separate pool of money that is set aside for unexpected expenses that come up in our everyday lives. Think of this fund as “planning for surprises.”
Examples are car and home repairs, deductibles for insurance claims or even unexpected medical expenses.
Q. Where do you keep it?
A. The best place to keep an emergency fund is in a separate bank account from what you use to pay your normal monthly bills. All banks offer savings or money market accounts that require different amounts to open. Many can be opened with as little as $100. The purpose for separating the money is to have it be less accessible to spend on impulse purchases.
Also, many employers offer Health Savings Accounts as part of their employee medical insurance coverage, which allows employees to save for medical expenses on a pre-tax basis. Ask your employer if this option is available to you.
Q. What is the best way to add to it?
A. The best way to build up your emergency fund is to add something to it each and every time you get paid. A seamless approach would be to set up an automatic transfer from your main checking account to the emergency fund each month. The transfer can occur like any other bill you have to pay without you manually having to move the money if or when you think about it.
Q. How much should I contribute per paycheck?
A. There are several ways to determine an amount based on what you are trying to accomplish:
For example, is there a specific goal you are trying to reach? Let’s say you are trying to save $500 for an insurance deductible that you need in 90 days or $1,000 for car tires that you will need next year. It might be a down payment for a house you want to buy in five years. Many people just save for an unspecified, true emergency — such as a job loss or medical emergency. Even if you save $20 per paycheck, that amounts to over $500 in a year if you get paid every other week.
Q. What if I’m already financially strapped as is?
A. Think about taking the approach of “pay yourself first” as a way to build up your emergency fund balance. Examine your spending habits and categorize expenses into buckets of “wants” and “needs.” Try to limit the “want” category as much as possible to make room for funding your emergency account. That is the “pay yourself first” bucket.
Q. With small contributions, won’t it take forever to grow? Where can I find extra money to add to it?
A. When your emergency fund accumulates over $1,000, then you can consider some interest-bearing accounts or even a mutual fund that should grow organically. You shouldn’t be too aggressive or risky with where the fund is invested. However, earning interest or taking advantage of fund appreciation adds money that does not come out of your earnings.
Q. Why is it so important to be able to borrow from myself? Why not put unexpected expenses on my credit card and pay if off over time?
A. Borrowing from yourself is cheaper. The rule of thumb is that borrowed money (which is what credit card debt is) is much more expensive than taking money out of your emergency fund. Paying high interest rates on credit cards equates to double or triple the cost for an item versus paying for it yourself.
Unfortunately, high interest rates on credit cards can be a revolving trap of never getting ahead and always being strapped for cash. Credit cards can be very easy to use for emergencies. But paying that debt off from your own funds as quickly as possible and reducing the overall interest you pay is one of the keys to financial success.
Joseph Keller has nearly 40 years in the field of commercial banking and lending. Among his roles is overseeing lending analytics and managing the bank’s credit risk. He is a member of Holy Family Parish in Kansas City, Kansas.