Nearly half of Americans were living paycheck-to-paycheck before COVID-19.
This statement is staggering – and one of the top financial advisor concerns. What will happen to your retirement plans if you have to dip into your funds early? You could face penalties, higher taxes and a different, more uncertain future.
Emergencies aren’t something you necessarily want to think about, but they can come when you least expect it – a natural disaster hits your home and a major home repair is needed; an unexpected health emergency occurs; you or your spouse suddenly find yourself without a job, which is what happened to many Americans when the Coronavirus pandemic shut down businesses across the globe.
In these times of crisis, everything leans on your emergency savings, making an emergency fund critical to your financial health.
An emergency fund can help secure the financial health of your business and your family, even if calamity strikes. If you didn’t have an emergency fund before, it’s wise to start one now. If you’re not sure about how to get started, contact PAX Financial Group to see how we can help you create a comprehensive financial plan that works for you.
A Quick Refresher on Emergency Funds
An emergency fund is an easily accessible amount of money that covers at least your essential expenses for a period of time (preferably three to six months’ worth) only to be used if you encounter a serious financial disruption or are unable to work. This can help cover you for a short-term season or for an extended period of time if need be. This fund should be earmarked for essentials primarily, but can cover any additional expenses if you’d like.
While building an emergency fund is fairly simple, it is also easy to put off. Once you’ve covered your monthly expenses, debt payments and investments, many people choose to reward themselves before putting money aside. But when an emergency occurs, these funds are your first line of defense and should be your go-to resource to soften the blow.
Without an emergency fund, many people have to seek other sources that may require them to jump through hoops or harm their investments in the long-run.
For example, using a credit card to pay a big expense like housing, insurance premiums or utilities can quickly increase your debt load. A large credit card balance can lower your credit score over time, and may even cause you to reach your credit limit if overused. When the emergency ends, you’ll walk away with even more debt. This can make it harder to save or invest in your future, because more of your disposable income must now be used to pay off debt.
Using your investment portfolio as a source of savings has its disadvantages as well. If you liquidate some of your investments, you risk selling while your investments are down and taking losses, or paying taxes on investment gains. Worse, if you have to make a retirement account distribution, or request a hardship withdrawal from your 401(k), you may be on the hook for fees and potential investment losses before receiving your money, as well as taxes.
This is one of the top financial advisor concerns.
Using your emergency savings as your primary protection helps keep your finances intact without having to open new credit card accounts or selling your investments.
Coronavirus Hits Texas Hard
The pandemic is creating severe economic pressure all over the South. Texas unemployment rates are on the rise and more than 70 percent of oil and gas industry workers are at risk of losing their jobs. Consequently, many are forced to rely on their savings during this crisis.
Going forward, gas prices are projected to stay low, potentially through the end of the year. Therefore, petrochemical businesses and employees may experience a rough road to recovery, making savings more important than ever. This doesn’t just apply to employees.
Small Business Owners Need Emergency Savings, Too
While emergency savings are crucial for individuals, an emergency fund is vital for contractors and small business owners as well. It is said that a “bad economy” hurts businesses the most, but the biggest factor in the survival of your small business is actually cash flow.
A banking survey found that 82 percent of small businesses fail due to cash flow problems, not product demand or competition. In emergencies, where individuals have savings accounts, businesses have retained earnings. Retained earnings is cash set aside to quickly cover payroll, overhead expenses in the event of a revenue shortage or financial emergency. These funds can be the lifeblood of your business when the unexpected occurs.
Also, in the event of property damage, equipment repairs or other business-related emergencies, insurance may not provide coverage quickly, or may not cover your expenses at all. Retained earnings should be a regular line item in your business planning and budgeting, protecting both your business and employees during a financial hardship.
(PAX Financial Group specializes in helping businesses too. Click here for specific services we offer for employers.)
How to Create an Emergency Fund
Creating your emergency savings requires setting a goal and forming consistent habits.
First, look at your basic budget to determine how much you spend on essentials, such as housing, food and debt each month. Multiply this number by 3, 6 and 12 months to use as your milestones.
Once you’ve determined your goals, decide how you will reach them. It is easier for many people to build their savings account if it’s an automatic process that takes place behind the scenes. To do this, you can often set up an automatic transfer online or talk to a representative at your bank to complete the process for you.
Use the funds set aside only for emergencies – times when you cannot generate income or when you have to make an urgent, non-luxury-related expense. If your income level changes, adjust your automatic savings percentage upward or downward accordingly. As you save, you will work toward the milestones you have established. An emergency fund can be an extremely helpful tool in your financial arsenal.
Survive this Crisis, and Thrive
The simplest tools are often the most effective. Your emergency fund can make the difference between going thousands of dollars into debt or removing large chunks from your retirement accounts during uncertain times – again, one of the top financial advisor concerns! As the economy slowly begins to reopen, remember to keep your budget in mind, especially if the Coronavirus rearises.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.