Spending Wisely The radio is playing, you're thinking about your grocery list, and then out of the blue, your car engine stutters and dies...
It's every car owner's most dreaded experience.
It happened to my assistant Laura last year. She put the key in the ignition... But the car wouldn't start. It sat there, a dead, 3,700-pound inconvenience.
Laura worried about how to get it towed... how to arrange transit to work... and how much repairs would cost.
It turned out several things went wrong at once with her 10-year-old car. Her total bill for fixing its ignition switch and a damaged undercarriage, along with the tow service and renting a car for a full week, came to about $1,200.
Unexpected costs like these are part of life. But most of America doesn't have enough cash on hand to cover this type of emergency...
Around 60% of Americans don't have enough in savings to cover even a $500 emergency. And the number that can't cover a $1,000 emergency expense is closer to 70%-80%!
Thankfully, Laura is in the minority. She has an emergency fund to lean on for exactly these kinds of unexpected bills...
I can't stress enough the importance of an emergency fund.
If you look at your financial life as a house, an emergency fund should be the foundation. You want to make sure, in the event of an accident or job loss, you have the funds available to pay your expenses.
Typically, financial planners recommend having about three to six months' worth of take-home pay in your emergency fund. We've even seen some recommendations for as much as nine months' worth of pay saved.
Before subscribing to one of these simple rules of thumb... consider a few things before deciding on how much is best for you.
1) Am I single or married? Single folks with a reliable job don't need to save as much... But married folks where only one partner has a job (even a reliable one) should have more in savings. That's because in the event of a job loss, you'll have to pay bills for two folks instead of one. Married folks where both spouses have reliable jobs don't have as much of a risk.
2) What are my monthly expenses? If you don't know how much you spend per month, take time this week to sit down and figure it out. Include bills for your home (like rent or a mortgage, utilities, homeowners' association fees, property taxes, and insurance), as well as car payments, taxes, medical expenses, and living expenses (like groceries).
3) How secure is my job and how quickly could I find a new one? This one's tricky. Some fields hire regularly, but others might not. Networking is a great way to increase your visibility, and keeping in touch with connections will help should you ever need to find a new job. And although age discrimination is illegal, we know several folks 50 and older who had a lot of difficulty finding a new job due to their age and being "overqualified."
4) What assets could cause an unexpected cost? In addition to job loss, sudden problems like car or home repairs often require the use of an emergency fund.
CarMD.com compiles nationwide averages for the most common car repairs. Here are the top three repairs needed for a "check engine" light and the average price paid in 2016...
- Replace oxygen sensor: $258.
- Replace catalytic converter: $1,190.
- Replace ignition coil and spark plugs: $401.
Home costs are even worse. According to HomeAdvisor.com, some of the most common repairs can add up to thousands...
For example, small roof repairs run a few hundred dollars. However, costs for replacing an entire roof can be anywhere from $3,000 to $12,000. Similarly, fixing an AC unit or furnace typically runs about $300, but a full replacement is anywhere from $4,000 to $8,000.
One important step... understand exactly what your insurance will or will not cover. Likewise, know your warranty terms and how long they last. And keep up with regular care and maintenance to avoid bigger problems down the road.
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5) Is my health in order? According to the Kaiser Family Foundation, the average family health insurance plan deductible is about $1,500. Should a sudden accident or illness hit you or one of your family members, can you afford to cover the associated costs? A good solution for this is to open a Health Savings Account (HSA)... something we covered here. If you aren't able to open an HSA, make sure to factor these costs into your emergency fund.
Finally, make sure that your emergency fund is kept in easy-to-access accounts. The idea is to be able to get the funds out quickly with little or no penalty fees. These include checking and savings accounts, certificates of deposit, and money market accounts.
Online calculators help, but make sure to use ones that account for all five of the above points. We suggest using more than one and averaging. You can start with this one from NerdWallet and this one from Practical Money Skills.
Once you calculate your emergency fund, you can start putting any leftover money to work in other investment accounts that can make you money.
Having a solid foundation is key to having a solid house. The same principle applies to your finances – start with an emergency fund and grow from there.
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Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Retirement Millionaire Daily Research Team
May 16, 2017