How to Build and Manage an Emergency Fund

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Imagine this: you’re driving your only vehicle to get to work, and suddenly one of your tires blows out. While inconvenient, you know you can replace one tire. You take your car to the shop, only to learn you need to replace all the tires. (Oh, and you should probably get your brakes done, too.)

Do you have enough cash set aside for small emergencies like this? Or would you put the cost of repairs on your credit card and struggle to pay off the balance before the end of the month?

This particular example may not resonate with you — but the details aren’t as important as the fact that you need to be covered for unexpected expenses like this. You need to know how to build and manage an emergency fund.

What an Emergency Fund Is — and Isn’t

An emergency fund (or emergency savings, or your rainy day fund) consists of cash you put aside you have to cover unplanned expenses and financial emergencies. You can use it to cover something like a flooded basement or to sustain you through a period of unemployment.

Emergency funds are not backup savings to be spent whenever you’ve exhausted your regular budget.

Setting up an emergency fund is imperative, because it’s designed to keep you functioning when an actual emergency strikes. No one wants to deal with that flooded basement, but it’s even more stressful if you’re worried about how you’re going to pay to clean up the mess.

An emergency fund is peace of mind so that you know you can cover the bills, go to work, and take care of your financial obligations without borrowing money or putting expenses on a line of credit.

How Much to Keep in Your Emergency Fund

Don’t let the idea of an emergency fund make you feel overwhelmed. Everyone needs one and anyone can start taking action (even just baby steps) to build a cash cushion.

When creating an emergency fund from scratch, consider how much money you would need if you lost your income temporarily. Your goal should be to save at least one month’s worth of your net pay (which would cover expenses for a month or possibly more if you’re living within or below your means).

If this seems like an impossible sum, remember you can save money in chunks. Start with a small amount and consistently add to your savings each week. Even $10 every Friday adds up over time — and it’s better to have something rather than nothing.

Once you’ve hit your goal of saving up one month’s worth of net pay, set a new goal. Increase your savings goal to 3 to 6 months’ worth of net pay. This will ensure you’re covered if you do happen to run into a major financial emergency, like an unexpected job loss.

Where to Keep Your Emergency Fund

Once you’ve saved up your cash, you need to know where to put it. While you don’t want to use the fund anytime soon, it is important to make sure you have quick access to your money if you need.

When thinking about where to keep your savings, keep in mind three key factors:

  • Liquidity
  • Accessability
  • Low risk

The best places to keep your savings include cash, savings accounts, money market accounts, and high yield savings accounts. All four of these options are liquid, accessible, and low risk. If you have any specific questions, your financial professional can help direct you to the best location for your savings.

It’s not fun to think about what can go wrong, but it’s financially wise to plan for the worst (while expecting the best). Although you may not know exactly what an emergency in your future might look like, you can prepare right now by building an emergency fund. Doing so will help you make financial disasters and unexpected circumstances a little less stressful if they do crop up.

The Serious Impact of Investment Fees

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Investing is a major part of building wealth and creating a nest egg that can work for you in the long-term. Unlike savings accounts, investing can result in remarkable returns on investment and can help beat the cost of inflation.

Investing is a key component to building wealth and paving your financial future. But there’s a not-so-hidden aspect that can slowly eat away at a nest egg if you’re not careful to guard against it: outrageously high investment fees.

The Serious Cost of Investment Fees

Investment fees may seem innocuous at first. But  they become more detrimental over time. Ignoring costs is a huge mistake.

Some of the worst fees appear in employer-sponsored 401(k) plans, and most people don’t even know how much the plan is costing them each year. Many employers are in the same boat, and simply don’t know the costs associated with the plans they’ve chosen for their employees.

Investors trying to go it alone may also end up paying more than if they had hired a trusted advisor working in their best interest, if they don’t understand how to evaluate funds or if they don’t know to pay attention to things like turnover in management, mutual fund fee structures, and other factors that can increase their expenses.

It doesn’t have to be this way. You need to learn how to manage those fees so you can maximize your returns.

How to Minimize the Impact of Investment Fees

Many people choose to invest their money because of the magic of compound interest, failing to realize that investment fees compound too. How can you avoid the pitfalls of investment fees as an investor and hold on to as much money as possible?

Be financially smart and choose low-cost options and do your due diligence when choosing a professional to help you manage your investments.

You’ll want to choose wisely when it comes to who manages your money too. Some financial advisors may take a large commission, which will eat away at your earnings. Choose a financial advisor who works as a fee-only planner and upholds a fiduciary standard.

Also, don’t forget to speak up! If you have an advisor or an employer that manages your 401(k), ask them about what investment fees you will be paying. Ask about any expense ratios, internal fees, commission fees, annual fees, trading fees and administrative costs that might cut into your investments.

You have a right to know and are entitled to that information, but you have to do your due diligence and ask. If your advisor isn’t transparent about fees and how they’re compensated, it’s time to find a new one.

And before investing in anything, think about rates, commission fees, managements fees, trading fees, and so on. Consider the long-term implications of how it will affect your portfolio.

If you’re in a position to make decisions around your company’s retirement plan options, you can do the following to potentially save thousands of dollars in fees for the employees of the business:

  • Establish a prudent process for selecting investment alternatives and service providers
  • Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided.
  • Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices

As an investor, empower yourself with information and do your research on any investment fees before funneling more money into any assets or funds. After all, it’s your hard earned money that you worked for — don’t you want to keep most of it?