By John Drachman
Still another consequence of our pandemic era: tighter credit standards.
A recent report from the Federal Reserve pointed out that from February to October last year the consumer credit rejection rate soared 27%.
With less opportunity to borrow money from financial institutions, the importance of keeping ready money on hand is more important than ever.
Even if you haven’t started an emergency fund, building up resources may be easier than you think. This way, you’ll be prepared to cover any surprises during the pandemic and you won’t be scrambling to borrow at a time when lenders are reducing credit access. Here are three steps toward building your emergency fund:
- Make a Plan: Many financial planners recommend keeping three to six months’ worth of living expenses on tap. Due to COVID, you may not be able to save that much money at the beginning. Don’t worry. The important thing is to get started – even with a smaller amount. The key here is to trim back expenses opportunistically to save as much as you can. By modifying spending habits slightly, you can uncover significant monies. This savings principle of starting small, or “the cappuccino factor,” can add up quickly if you get in the habit of redirecting dollars from discretionary purchases to emergency savings. For example, by reducing purchases of 20 cappuccinos a month to 10, you could save $480 a year. Look for other ways to reduce spending on regular purchases for car washes, streaming services, take out and more.
- Go Digital: Automate your emergency savings plan by eliminating the temptation of spending your savings while it’s still hanging around your checking account. Arrange instead for systematic monthly transfers to an account you have earmarked solely for your emergency fund. While your fund must be in a relatively accessible account, consider using a high yield savings vehicle that will release your monies upon request within a few days. These accounts allow your emergency savings to earn an above-average APY (Annual Percentage Yield). Consider this a perk for setting aside those emergency resources. Accounts like Marcus by Goldman Sachs High Yield Online Savings and Ally Online Savings Account both currently offer a 0.50% APY, which is 10 times the national average of 0.05%, according to the Fed.
- Monitor your progress: Keep track of your progress every week to make adjustments to your plan if warranted. If you get a raise or new job with a higher salary, consider upping the amount you transfer. On the flip side, if adversity raises its head, consider temporarily dialing back your monthly savings rate.
Different types of emergency fund strategies involve varying degrees of risk. However, you do not have to play the emergency savings game alone. Working with a financial professional can help ensure you meet sudden expenses with sufficient resources both during – and after – this COVID era.
John Drachman is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.