Emergency Fund 101

Let’s face it. Life is full of obstacles, emergencies and trying times that require money. If your furnace blows or you lose your job, do you have cash tucked away to help you through? If the answer is no, this article is for you. That’s because, today, we are talking emergency funds.


What Is An Emergency Fund?

It’s exactly what it sounds like. It’s a cash reserve that you set aside for unplanned expenses and emergencies. This might include something minor like a trip to the doctor, a blown tire or an unexpected school expense. It might be for something major like making up for lost income or a catastrophic health diagnosis.

Why Do I Need It?

Even a minor financial shock can set you back and cause debt to accumulate. Debt has a lasting effect and sometimes negative impact on a family or individual’s finances.

How Much Should I Save?

If you’re living paycheck to paycheck or have an erratic pay schedule, setting aside even a few dollars can be challenging. That’s why it’s best to start with your own savings goal. A good aim for that initial goal is $1,000. However, most experts agree that you should ultimately aim for three to six months of expenses. Even if your initial goal is just a couple hundred dollars, having something to fall back on will be helpful.

How Do I Build My Emergency Fund?

There are a few approaches you might take:

  • Save those windfalls. Tax refunds and overtime income make great seed money for an emergency fund.
  • Pay yourself first. Figure out how much you can feasibly save each paycheck and transfer that amount from your checking to savings before you do anything else. Setting up an automatic transfer to take place on payday is a great way to make sure you are saving toward your goal.
  • Take on a side hustle. Cut grass in your neighborhood this summer or deliver pizzas on the weekend, there are a number of ways to pick up a few extra bucks a month.
  • Set aside extras. If the electric bill is lower than you anticipated, save the money – even if it’s just a few bucks!
  • Sell something. A yard sale is a great way to make some money while clearing out clutter. Have an extra car that you don’t need? The proceeds could go a long way toward preparing you for an emergency.

It may take you a while but having some extra money in the bank will help you avoid debt and give you peace of mind. Even if your goals start small, having that savings when you need it will make a difference!

Need more inspiration? We have written about looking for ways to cut costs. Click below to read more on how you can trim expenses to save more money!

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Five Ways Not to Blow a Financial Windfall

Whether you’ve won the lottery, inherited a fortune or sold your business, landing a financial windfall can drastically improve your financial outlook. But the sudden wealth can also leave you stressed and unsure how to handle the cash.

First, hit the pause button, says Don Hance Jr., founder of LifeSighted, a financial planning company. Take time to create a spending plan to avoid making poor decisions.

“You want to give yourself time to take stock of everything and work through emotions before spending the money,” says Hance.

Here are five smart ways to allocate a financial windfall.

1. Cushion your nest egg
Maximize your 401(k) contributions if you still plan on working, or at least contribute enough to earn the full employer match, which is essentially free money for your retirement. As you put more money toward retirement, the windfall will fill that gap in your cash flow.

This move also carries tax benefits: contributions are taken out of your paycheck pre-tax, lowering your taxable income for the year. Investments grow tax-deferred until withdrawals at retirement.

Also, look into funding a Roth IRA if you’re eligible, says Mark McCarron, a financial planner and principal at Bond Wealth Management, LLC. Contributions to Roth retirement accounts are made after-tax, and your investments grow tax-free. Unlike a 401(k), there’s no income tax on withdrawals made in retirement.

“It is one of the only free lunches the IRS gives us,” McCarron says.

2. Pay off toxic debt
If you’ve been trying to pay off debt, this is an opportune moment. Pay off toxic debt with the highest interest rates first, such as credit cards, payday loans, title loans and installment loans.

For example, a credit card with a $10,000 balance at 20% interest would cost $11,680 in total interest if you made $200 monthly payments. It would take more than nine years to repay the debt.

Use your windfall to pay the balance in full, and you’ll save interest.

3. Build an emergency fund
An emergency fund is money set aside to cover unplanned expenses, such as car repairs or a job loss, so you don’t have to rely on credit cards or high-interest loans.

A good rule of thumb is to have three to six months of expenses saved, says McCarron.

The amount to save depends on factors such as job security and how much debt you owe. Keep the money in a high-yield savings account, where it earns some interest and is readily accessible.

4. Invest in yourself or a loved one
Investing isn’t limited to your retirement; you can also use some of the windfall toward self-development. Go back to school, hire a career coach, travel or learn a new skill.

Consider starting a 529 savings plan to support a child, relative or friend through college, says Levi Sanchez, financial planner and co-founder of Millennial Wealth, based in Seattle.

The plan provides tax-free investment growth and withdrawals for qualified education expenses, such as tuition, fees and books. Most states also offer a tax break for residents.

Under the current tax law, 529 withdrawals up to $10,000 per year can be used for tuition costs at elementary or secondary public, private and religious schools. Check with your state’s plan before making withdrawals for this purpose; not all states have adopted the changes.

5. Give back
Consider making charitable donations to an organization or social cause you support.

Your gift can positively impact the organization, but unless it’s a sizable donation, it may not help your taxes. That’s because you need to itemize your taxes to get a deduction, and itemizing only makes sense if your deductions add up to more than the standard deduction.

For 2018, the standard deduction is $24,000 for married individuals filing jointly or $12,000 for single individuals. Maintain records of your contributions if you donate.

Giving money to family and close friends doesn’t carry tax benefits. But if you’re feeling generous, you can give up to $15,000 per individual in 2018 without having to file a gift tax return, says Sanchez.
A financial planner or tax professional can provide further guidance on managing a windfall.

Steve Nicastro is a writer at NerdWallet. Email: steven.n@nerdwallet.com. Twitter: @StevenNicastro.

The article 5 Ways Not to Blow a Financial Windfall originally appeared on NerdWallet.

What to Do With Your New Raise

Did you get a raise in 2015? According to PayScale’s annual Compensation Best Practices survey, more than 85% of large and medium-size companies gave raises that year. In 2010, only 30% of companies gave their employees a pay boost, the lowest percentage since PayScale began its survey. So raises are on the rise.

If you got one or are expecting to get one this year, what will you do with it? Here are five smart moves for that additional money.

Pay off debts
Eliminating debt and reducing the money you pay in interest should be the first step. Say your raise was $5,000 and you’re paid twice a month. You’ll be earning an additional $200 before taxes each pay period. If you earmark $300 for your credit card debt each month, you’ll pay it off faster, save on interest, improve your debt-to-credit ratio and raise your credit score.

Build your emergency fund
Now that your credit card debt is paid off, it’s time to build up your emergency fund so that when stuff happens, such as major medical expenses or unexpected job loss, you don’t have to run up your credit card bill. Financial experts say a good emergency fund should cover between three and six months of living expenses. If you normally spend $2,500 a month, you would want build up about $15,000 for a six-month emergency fund.

Because an emergency can strike at any time, having quick access to your cash is crucial. Savings accounts are a good choice because they’re low-risk investments that allow you to withdraw your money without hassle. This emergency stash should be a separate account from one you use daily so that you’re not tempted to dip into your reserves.

Community banks, such as VCNB, offer several types of savings accounts that can suit consumers’ specific financial needs.

Invest for your retirement
Concern about having enough money for retirement is the No. 1 personal finance worry for Americans, according to Gallup’s annual Economy and Personal Finance survey. Don’t be part of that crowd. If the company you work for offers a 401(k) with an employer match, be sure that you’re contributing enough to get the maximum match that’s offered. The money you contribute will reduce your current tax burden, and the match that your employer provides is essentially free additional retirement income for you. Then, consider using the remainder of your salary increase to open an Individual Retirement Account for your future. Along with assuring you a more comfortable retirement, IRAs can also offer you tax benefits.

Give to charity
If you’ve ever thought, “I’d give more to charity if I had more money,” well, now you do. You could make a donation to a charity, your alma mater or a good cause. You’ll feel good about helping others and, as long as it’s a qualified charity, you’ll be able to deduct your donation from that year’s income tax.

Live a little
Treat yourself to something fun to celebrate your raise. After all, you earned it. Dinner at a special restaurant or a relaxing day at a spa won’t eat up all your new income. Just remember that your raise isn’t a lump-sum bonus: It’s coming paycheck by paycheck, and you should invest or spend it that way.

Ellen Cannon, NerdWallet

© Copyright 2016 NerdWallet, Inc. All Rights Reserved




Preparing For Unexpected Expenses

Studies show that the majority of American households don’t have enough money in their rainy day fund to cover an unexpected expense.

It’s a fact of life. Emergencies pop up, things break and life costs more than you think it should. That’s why it’s important to be prepared. You can’t prepare for every possible emergency but stashing away a few dollars every paycheck can help.

Some expenses are truly unforeseen like a car accident, death or health problem. However, there are some that you may see coming. It’s a good idea to look around your home and consider the state of your possessions. Is your furnace starting to make a noise? Are the tires on your car showing their age? How old is that refrigerator anyway?

These things are all expensive to replace or repair but are imperative to have.  You can’t survive the winter without heat in your home. You require some way to keep your food cold or frozen so you have to act quickly when the fridge dies.

Make a list or at least a mental note of what could go wrong and add up the costs. The total will probably scare you but might provide some tangible reasons to start saving for emergencies.

Now stop and think about how much you can save each paycheck or each month. If you can stash $100 a month, you would have $1,200 saved in a year. Can’t save that much? That bonus at work or tax refund could go a long way toward padding your emergency fund and securing your budget in a crisis. Put away what you can and try to remember that this money shouldn’t be touched for anything less than an emergency.

Just a reminder: a Passbook Savings account at VCNB is a convenient place to save. If you have a checking account as well, it’s easy to transfer funds between accounts or even automate your savings with automatic transfers from your checking to savings.

If you have to take from your emergency fund, be sure to replace the money as soon as you can and continue building that safety net for future problems.

Want to read more about the reasons you need an emergency fund? Click here.   

Planning for the unexpected

If there’s one thing in life you can count on, it’s that you should expect the unexpected.

This is especially true when it comes to life and finances. Most Americans are ill equipped for unexpected expenses and, even those with a well prepared budget can struggle to recover.

While you can’t necessarily predict the unexpected, you can plan for it by setting aside a little money each month in an emergency fund. This will give you the peace of mind that there will be money to help with unexpected expenses and the luxury of not sinking into debt the next time catastrophe strikes. Your emergency fund should only be tapped to pay for major, unplanned expenses and not for vacations, shopping or other fun.

Think you don’t need an emergency fund? Think again. Here are just a few things – big and small – that can go wrong at any time.

Job Loss – This is the big one. If you find yourself unemployed it is important to have enough in savings to see you through.

Appliance Breakdown – You come home to find that the fridge died sometime while you were gone and all your food is thawing. When it comes to household appliances, time is usually of the essence because it is so difficult and sometimes expensive to live without them. Yet, they are expensive to repair and replace.

Pair of Human Hands Checking the Blood Pressure of a PatientHealth Bills- Even if you have insurance, the smallest ailment can cost you a lot of money through office visits, prescription co-pays, blood work and lost wages.

Unexpected Travel – Sometimes we just have to leave home unexpectedly. A death in the family or an ailing relative are two events that will leave you with no choice but to travel. Gas, airfare, hotels and food add up quickly, especially when there was little time to prepare.

Traffic Tickets –Parking and traffic tickets can get pricey, throwing the household budget off course faster than you can say – “do you know how fast you were going, sir?”

Home Repairs – Whether it’s a leaky roof, an aging furnace or an army of Carpenter Ants, home repairs always cost a lot more than you think they should and typically come at the most inconvenient time. If you live in an older home, you may consider creating a budget category just for these types of repairs.

Car Repairs – Someone left a dent in your new car, the transmission went out and the breaks are squealing. Sound familiar? Car repairs are never cheap and, like home repairs, always come at the worst possible time.

Seasonal Expenses – Record cold temperatures this winter left many Ohio residents scrambling to cover seasonal expenses. Higher utility costs, frozen pipes, new snow tires for the car or fuel for the generator will add up quickly and can completely break the bank.

Unexpected expenses happen to everyone. With a little effort, unexpected doesn’t have to mean unplanned. What else can you add to this list? Plan ahead, squirrel away some funds and you will be ready!