Now is a Good Time to Discuss Setting Up an Emergency Fund
Along with the tragic health issues caused by COVID-19, many people also suffered an unexpected decline in income due the lockdown put in place to slow the spread of the virus which resulted in a severe decline in economic activity. While the stock market has recouped much of the losses that were sustained in February and March, the economy will likely take longer to recover and for those that have lost a job it may take a bit of time to find a new opportunity. According to the Bureau of Labor Statistics, the amount of time that someone is out of a job is about 22 weeks. Even though income may have declined, the fixed expenses such as mortgage, car payment, insurance, food etc. have not. Establishing and maintaining an emergency fund is a good way to help manage through a decline in income while avoiding taking on high-interest credit card debt or getting behind on payments resulting in late fees.
An emergency fund is an account that should cover 3-6 months of expenses in the event of income disruption or other emergencies. The account should be liquid (cash, CDs) so that the money can be accessible very quickly and should also be separate from a savings or other type of account that might be used for other needs. Also, the emergency fund should be earmarked for real emergency situations and should not be used to pay for vacations, gifts, or entertainment. The prospect of setting aside such a large sum of money can be very intimidating. The best way to establish an emergency fund is to start small and make the contributions to the emergency fund a part of a monthly budget. Once the account is funded, make sure to review your expenses annually and make changes to the emergency fund if needed. Creating an emergency may seem like added expense to some people, but once the fund is set up and maintained, it will provide peace of mind knowing that there is a bit of a safety net in case something unforeseen happens.
If you would like a complimentary portfolio review or to discuss how Chatham Wealth Management can help with your financial planning and investment management needs, please feel free to call at (973)886-3078 or visit our website at www.chathamwealth.com.
Brian McGeough, CFP®
Chatham Wealth Management