June 21, 2016 in Savings

Financial advisers’ secrets for starting and keeping an emergency fund

If there’s one thing financial advisers can agree on, it’s that having some money set aside that you can tap quickly to deal with unexpected expenses or income disruptions is crucial.

But where to keep your emergency savings and how much you need to protect yourself are more complicated issues. And just getting started is daunting for many people; more than a quarter of Americans have no rainy-day money, a Bankrate survey found.

We asked fee-only financial planners for their best advice on how to start an emergency fund. Here’s what they told us.

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“Building your emergency fund does not have to be daunting. Start small, saving $1 a day for one week. At the end of the week, you’ll have $7. Then, up it to $2 a day for the next week to have $14, then $3, $4, etc. If the maximum you can save is $10 a day for a week, just stay at this number and continue this for a year. At the end of the year you would have saved $3,325! Consistently stowing away money, albeit seemingly small, can make a huge impact in building your emergency fund and providing you with a safety net.”

— Avani Ramnani, CFP professional and director of financial planning and wealth management at Francis Financial in New York

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“The more steady and reliable your income, the smaller your emergency fund can be, as little as about 3 months’ expenses.

“The rate of return you should expect on emergency funds: 0.0%. Zero. If you get anything more, make sure it’s FDIC-insured, or has equivalent safety.

“If an investor thinks his/her emergency funds are in stocks, they’re mistaken. That’s not an emergency fund. That’s gambling in the stock market.”

— Kenneth F. Robinson, CFP professional at Practical Financial Planning in Cleveland

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“When we talk about building an emergency fund, we often focus only on saving, and not enough on what we would actually do if there is an emergency. One consequence is that sometimes the main financial decision-maker in the family may be unable to make decisions temporarily due to the emergency, and the spouse or children don’t have the financial acumen to deal with money, even if there is an emergency fund they can tap. So no matter whether you currently have enough emergency funds, one thing you can do is to educate yourself and your family with the basic handling of household finances, and know when and how to access the emergency fund.”

— Hui-chin Chen, CFP professional and financial planner at Pavlov Financial Planning in Arlington, Virginia

“My belief is that emergency money is (often) a second thought. Many state their emergency money is a home equity loan or, unfortunately, lower-interest credit cards. What they don’t realize is that these vehicles are, in the long term, a negative cash flow and not a positive.

My advice is to have $10,000 to $20,000 as a minimum emergency fund. Use that and pay yourself back as you would your line of credit or credit card.”

— Audrey Jones, CFP professional and president of Financial Life Designs in Orlando, Florida

“There is no question that building and maintaining adequate emergency savings should be one of the most important and core financial objectives for everyone. A related, and even more important, financial objective, in my opinion, is having access to sufficient liquidity. I define liquidity as ‘the ability to convert existing sources of funds into readily available cash when needed without loss of significant market value.’ I consider liquidity to be a more critical issue than emergency savings. I do strongly believe emergency savings should be the ideal and primary source of liquidity whenever possible. Additional sources of liquidity may include, but are not limited to, an untapped home equity line of credit and temporarily borrowing funds from another person.”

— Christopher P. Parr, CFP professional and president and CEO of Parr Financial Solutions in Columbia, Maryland

“I view an emergency fund similar to insurance: protection I hope to never need. I am also very mindful of minimizing opportunity costs, so I suggest clients can use their principal contributions in a Roth IRA as an alternative to cash held for an emergency that may not come. Remember, principal contributions can be withdrawn from a Roth IRA at any age, without penalty or tax.”

— Rob Siegmann, principal and chief operating officer at Total Wealth Planning in Cincinnati

“Emergency savings is really a ‘cushion’ account — a pillow that allows you to sleep comfortably at night and wake up feeling ready to deal with whatever life brings you.”

— Lazetta Rainey Braxton, CFP professional and founder and CEO of Financial Fountains in Baltimore