We’ve previously written about Bookkeeping for the Coronavirus. In that spirit, we have a tax filing tip: use your refund for an emergency fund. We’ll show you how, why, and more below.
1. Why You Should Have an Emergency Fund
We’ve all seen massive layoffs, furloughs, and the like during the Coronavirus pandemic. Many Americans are being forced to dip into their retirement funds, with harsh penalties to follow. Those of you who have an emergency fund are glad you did. Those who don’t should read on, as you know why you need one. Along with global pandemics, other reasons you may need an emergency fund include sudden illness, expensive home repair, car breakdown, extreme weather, and many more. Best of all, your emergency fund is yours to do with as you like include adding to, withdrawing from, and investing in.
2. How to Begin an Emergency Fund
The good news is it is easier than ever to start an emergency fund. You simply set aside a set amount each month to put into it. We recommend at least $50 per month but emphasize more – especially for those of you with a large family. These same goes for businesses of all sizes. You should ideally have six months of your bare income stored away, hopefully earning at least a little interest.
Steps to Starting an Emergency Fund:
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- Calculate all of your bills including your average spend on rent/mortgage, utilities, car payments, groceries, insurance of all sorts, etc. Multiply this total by six to get your ideal emergency fund.
- Choose your type of emergency fund. We’ll have more on this below. You may choose from standard items such as a checking or savings account because they are easy to start and get to.
- Automate the emergency fund. Have your new account programmed to withdraw your desired amount each month. Just select the account you withdraw from and to. You can even have part of your paycheck directly deposited into it in some cases.
- Plan your windfalls – Getting a tax refund this year? Christmas bonus? Other windfall? Plan to put at least a percentage of each into your emergency fund.
3. Recommendations for Investing Your Emergency Fund
You have many options for investing your emergency fund and still being able to access your funds at any time. For example, many banks offer interest earning accounts. The interest rates aren’t great, but they’re always better than nothing.
For example, Capital One offers a 360 Performance Savings account that offers a 1.5% annual percentage yield no matter what your balance. In addition, the account has no monthly fees and no minimums.
Consider a CD if you believe you won’t need your emergency fund for a while. As of today March 19th, the federal rates were still 1.5%, or not bad given this market. However, some banks and credit unions can offer rates of over 2%.
Visit Bankrate.com to get more tips on starting an emergency fund.
Houston Tax Filing Tip: Get a Bookkeeper
Feel free to contact us if you need help filing your taxes and live in the Houston area.