Picture this: It is a snowy December morning in Wisconsin. You are headed off to work for the day, thinking of all the tasks you know must be completed first thing. The roads are slick with the fresh snow, and, before you know it, your car is spinning out of control headed right for the ditch on the other side of the freeway. Then, you hear the sirens of an ambulance coming your way. You have to be taken to the hospital, but luckily the only real damage is your broken leg and totaled car. The doctor says that you will be in a full-leg cast for up to 10 weeks and you cannot work for at least four weeks.
Now, imagine that same scenario with no worries about how you will keep up with your monthly expenses. By setting up an emergency fund, situations such as a health problem or unemployment do not have to be so traumatic to your financial life.
1. What are the emergency fund guidelines?
In general, an emergency fund should cover about 3-6 months of expenses. According to the Bureau of Labor Statistics, the average household has yearly expenditures of close to $55,000. Broken down, the average household should plan for approximately $27,500 for a six-month period of unemployment. This is an average, however, so any given household could have higher or lower yearly expenses.
2. How can you help clients set a good foundation for success?
When you are working with your clients, work through the steps of your client’s emergency fund the same way you would their retirement goals. Once there is a plan in place, provide the tools to successfully execute it. The first step to saving the correct amount is to figure out how much the client spends each month on necessities. Once the categories—such as housing, transportation, healthcare, and loan payments—have been set up, multiply that number by three. The answer will be your three-month emergency fund goal. Create a schedule with a target completion date to help keep you on track. Working closely with your clients and providing technology to help them find success will help keep them focused on the goal.
3. How can clients continually maintain their emergency fund?
Once you have helped established their plan and a way to track progress, it will become easier to keep the emergency fund top-of-mind when progressing through their overall financial plan. If the family eats out four times a month, have them start out easy by cutting back to two times. They can then put the money they would have spent on the other two dinners in their emergency fund. Will they receive a bonus from work or a hefty tax return? Add that money into the fund! By helping clients make conscious, daily changes to their spending habits, they can save for a “snowy day” and it will be virtually painless.