The pandemic brought unprecedented challenges to Americans' personal finance and while the economy and the job market have yet to recover fully, this still may be a good time to start preparing for the next potential downfall by building an emergency fund.
In its new Ask the Expert series, Cashay reporters connect with experts on vexing personal finance topics surrounding all of life’s milestones and financial challenges.
Denitsa Tsekova connected with certified financial planner Jennifer Grant of Perryman Financial Advisory in Dallas. Grant works mostly with working women who are juggling families and jobs and dealing with financially challenging times.
[Interview has been edited for clarity and length]
How can you start to build an emergency fund after a challenging time for your finances like the pandemic?
The two things that I really suggest when people look back is to think when the pandemic hit and you were really struggling, what's the amount that would have been helpful.
If we had an extra $1 million that'd be great, but in reality if you'd had an extra $100, would that have gotten you over the hump? If you had an extra $1,000, would that have gotten you through the hump? Start with that as your first goal.
It's easy for me to say, "oh you need three to six months of living expenses." But when you're just starting to build, it's so much easier if you start with a small goal and work towards that, and then celebrate and then set it another one. Looking back over the last year and thinking what's the smallest amount that really would have helped me out and make that your goal to start with is helpful.
It also gives it context. It's not just $100; it's that would have gotten me to the end of the month and I wouldn't have to worry about food, or I wouldn't have had to worry about rent. Then it's a little more tangible, it's so much easier to stay connected with your goal if your goal looks like something. Money doesn't motivate us. Not having that pain is what motivates us.
How do you prioritize building an emergency fund when you have to pay off debt too?
Part of it's just taking a small amount and continually moving it over. When you look at how much money I bring in and this is how much is going to those things that I absolutely have to pay. You know, can I move $1 a week, can I move $5 a week, into a savings account to have it start growing for me?
The other thing is we're coming up on tax time, and the stimulus, and some of the other things that are coming out. If you get a windfall of cash that you know is not part of your normal income stream — like a tax refund or like a stimulus check or something like that. If the stimulus package goes through, take $250 of that and make that your emergency fund, and then use the rest to pay off debt.
If you get money as a refund or a stimulus, just know that that's important to you and take some of that money off the top, put it in your emergency fund, and then work with the next thing.
What should be the goal for an emergency fund? How should it change with age and family status?
The biggest thing is to think of three to six months of your expenses.
If you're two young people that live together and you both have jobs, then you don't need as much because you can count that the other person, hopefully, won't lose their job at the same time. So you can save a little bit less.
On the other hand, if you're a single mom, then your goal is to save a little bit more because you're the only safety net that you have.
The other thing would be: Do you have family or do you have a social support network that's going to help you? If you've just moved to a new place, then you may not have that. Then you need to see save a little bit more money in case something happens and you can't go to a family member.
How do you stay motivated when building an emergency fund?
Start with a smaller goal, so that you can make that goal and get a little bit of momentum.
The other thing is to track it. It's like anything else. It's a lot easier to stay motivated if you can see it. Is that a spreadsheet, is that a piece of paper on your refrigerator? It's constantly a reminder that you're making progress.
That doesn't happen overnight, but if you're continually making progress, you'll get there. Whatever it is, if that's an app or a spreadsheet, keep up with what you're doing so that you know when times are hard, you have that visual reminder that you've got a goal, you know why you're doing it and you've made progress.
With savings accounts rate being low and many people turning towards investing for the first time, what is the best way to store your emergency fund money?
Your emergency fund should be in a savings account. It shouldn't be subject to the whims of the market and once you get that emergency fund that goes somewhere safe, that's not going to get affected by an up day in the market or a down day in the market.
My next go-to is if your company matches on the 401k, and they give you 3%. If you put 3% in, that's free money. So next you go to your retirement where you're getting a tax deduction, you're getting a free match. Take advantage of that.
If you want to get into the fun kind of investing, which a lot of people are with the Robinhood apps, I really look at that the same way you look at fun in a casino. Because a handful of people out there win big, but there's a whole lot of other people out there that lose. It should be more of something that you enjoy doing because you think it's entertaining.
Read more information and tips in our Insurance section