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An Emergency Fund for Life Unexpected

An Emergency Fund for Life Unexpected

One of the first lessons of finance we are taught, by our parents or through some basic personal finance course, is to make creating an emergency fund our top priority. Having a reserve of cash equivalent to six to 12 months’ worth of living expenses is considered the most fundamental principal of financial security. Yet, the reality is that less than 10 percent of income earners have enough reserve cash to cover more than a month’s worth of expenses1. Is it denial, ignorance, laziness, that leads people to the verge of bankruptcy? Or is it that they lack the ability or wherewithal to do it?

Actually, anyone, regardless of their wherewithal can create an emergency fund; however, it does require a plan and the discipline to execute it. For those on tighter budgets, it will also require some attitude adjustment regarding your spending habits. The first step in creating your emergency fund is to acknowledge the financial trouble you could find yourself in should you lose six or 12 months of income; then set a goal to prevent it. From there, just follow these essential steps:

Quantify your goal: You need to determine how many months of living expenses you need to have in reserve. The minimum should be six months; 12 months is recommended. The higher your living expenses, the longer your reserve should be.

Establish a serious budget: Now is the time to streamline your budget in anticipation of the unexpected. Your objective is to free up cash flow that can be allocated to your cash reserve. Once you determine a dollar amount or a percentage of your income you want to allocate, put yourself first in line – in other words, pay yourself first each month. If an unexpected expense creates a cash shortfall, find something else in your budget to cut, but don’t cut your savings allocations.

Establish frequent benchmarks: It’s easier to stay on track and stay motivated when you break the overall goal into monthly or quarterly benchmarks.

Make it automatic: Many banks offer savings accounts that can be set up with automatic deposits from your checking account. You won’t even feel it.

Get rid of debt: While your savings goal is the top priority, you need to create more room in your budget to reduce or eliminate debt. As you reduce your debt, the increased cash flow available can be applied to savings, thereby accelerating your savings goal.

Change your attitude about spending: While you shouldn’t have to deprive yourself of the necessities of life, a new attitude about spending could do wonders for your cash flow. Don’t buy on credit. Ask yourself if you really need it. Never pay retail. Make the things you have last longer. Do without some things for a while. Frugal is cool again. But then, when you hit or exceed your savings benchmarks, feel free to reward yourself with a small splurge.

Cover everything: Insure everything you own – your home (or, if you rent, your property), your car, your valuables, and your most important asset, your income with a disability insurance policy. For a couple of hundred dollars a year you should consider adding a personal liability umbrella policy to cover everything else.

Don’t touch it: The biggest challenge for many people is to refrain from tapping their emergency fund for reasons other than an emergency. This tends to occur early on when your new attitude and habits have yet to be fully formed. Fight the temptation.

It’s recommended that you utilize bank savings or money market account for your cash reserves. You won’t be earning a lot of interest, but your real objective is to keep your reserves safe and liquid. Once you’ve met your emergency fund savings goal, you can then allocate your monthly savings to other types of investments that can have better earning potential while enjoying greater financial confidence.

Insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with costs and complete details.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing

Tags: Emergency Fund, Financial Wellness

12 Strategies You Should Know to Build an Emergency Fund

12 Strategies You Should Know to Build an Emergency Fund

When it comes to preparing for a rainy day, the best time to act is now. Establishing a 3-month or $10,000 emergency fund is a critical pillar to your financial wellness - and it will help you sleep a whole lot better at night.

But how can you find room for this essential line item in an already tight budget? Here are 12 tips to help get you there.

  1. Set a target date to reach your goal. This can help bolster your motivation, especially if you need to cut back a little on your expenses (see #3). Remember it’s only temporary!
  2. Decide where your fund will reside. Consider a conservative option such as an FDIC insured savings account. This is not the place where you want to take on any significant risk - liquidity is the primary goal.
  3. Put your monthly budget on a diet. Trim the fat wherever you can. Cut down (or out) your latte habit until you’ve reached your goal. Dine out less, carpool to work, suspend some streaming services and do whatever else it takes to free up necessary cash.
  4. Eliminate a couple of big expenses. If you don’t want to feel the pinch on a daily basis, plan a staycation instead of pricey travel and bank the difference. Or, hold off on home improvement projects to make sure you can actually keep making the mortgage payments should disaster strike.
  5. Sell some stuff. If you’ve been looking to do a little decluttering anyway, now would be a great time to do some online selling or have a huge garage sale. You might be able to make a sizeable dent in funding your reserve and liberate some extra space in your attic and closets along the way.
  6. Leverage found money. Use an annual bonus, gifts or a tax refund to prepare for disaster. It may be easier and faster than trying to reign in your budget from every direction.
  7. Generate some extra income. If you have more room in your schedule than in your budget, take on a side hustle by doing some freelance work on Fiverr, or try Ubering your way to disaster preparedness.
  8. Renegotiate your debt. If you’re carrying a lot of revolving debt at a higher rate, ask your creditors if they would be willing to lower the interest rate. Or consider using a zero-interest credit card balance transfer promotion and sock away what you used to pay in interest charges.
  9. Pay yourself first. Until the emergency fund is in place, make setting aside whatever you can toward this goal a top priority, along with necessary expenses and timely debt payments. Making the payment an automatic transfer from your paycheck into a savings account is a great way to keep yourself honest.
  10. Confirm insurance coverage. If there’s an emergency, your emergency fund is only one potential resource at your disposal. Review your disability and homeowner’s coverage, medical plans, car insurance, and long-term care plan, and consider obtaining an umbrella policy for an extra layer of protection.
  11. Don’t stop once you’re done. After you’ve reached your emergency funding goal, contribute as much as you can on a regular basis to a well-diversified retirement plan. The government has increased the contribution rate for 401(k) plans to $18,500/year starting in 2018. Workers over 50 can make an additional “catch up” contribution up to $6000 for a total of $24,500 annually(2). And this does not include funds received as a company match. If you’ve already adjusted to a leaner budget, this may be the easiest time to supercharge your retirement savings so you can pursue your goal of enjoying your golden years in style.
  12. Reevaluate your emergency needs annually. Remember, as your expenses increase over time, your emergency fund will need to adjust accordingly. So, each year take a fresh look at what it will take to weather the storm and add to your fund as necessary. And most importantly, resist any temptation to tap your emergency fund in any situation other than a crisis. After all, you can’t put a price tag on peace of mind.

We encourage you to set up an appointment to discuss your emergency fund and all your retirement needs with your 401k advisor today - your financial future just may depend on it.

Tags: budget, emergency fund, save



NFPR-2019-71 ACR#324824 08/19

What is a Target Date Fund, and Should I Invest in One?

What is a Target Date Fund, and Should I Invest in One?

Target date funds, or TDFs, have become very popular among investors in recent years. And if you’re opening a new 401(k), this may be an option to consider if you want to minimize the stress of adjusting your retirement strategy as you get older.

In the past, 401(k) participants would have to create their own blend of investments called an asset allocation, typically including an array of stocks, bonds and cash equivalents. Asset allocation should reflect the risk tolerance of the investor as well as the time horizon until the money is needed, usually retirement. Typically, a longer time horizon allows for greater risk, which might translate to a higher proportion of stocks and riskier investments, whereas a shorter time horizon warrants more conservative choices.

That means your investment strategy should include rebalancing the allocation periodically as the retirement or target date draws closer. And this requires monitoring investments and making decisions about what exactly to adjust from time to time.

But what if this could all be done automatically, with no action required on your part?

This is precisely what a target date fund aims to do. The manager of the fund constructs a strategy around a target date at which time the participant is expected to start withdrawing funds. This target date is typically the participant’s retirement date, although it can also be directed toward other needs, like a child’s college fund. The fund manager will periodically reallocate the investment mix, usually annually, to become more conservative as the target date draws closer.

The Upside

Good for hands-off investors. TDFs can be an excellent option for those who tend to avoid managing their investments but still want a steady path to retirement.

Simplicity. In theory, choosing a TDF could be the only investment decision you make, although this strategy may not always be advisable. Be sure to consult a qualified investment advisor.

Less intimidating. If you’re not particularly interesting in learning about different asset classes, mitigating risk and other issues an informed investor should understand, then a TDF offers a way to easily hand those decisions over to a professional.

The Downside

Not amenable to changing goals. If your investment goals suddenly change or you have to retire earlier or later than planned, you could find yourself poorly positioned if your money is invested in a TDF whose target date no longer matches up with your needs.

Potentially more expensive. As TDF’s are actively managed by a fund manager, they typically will have a higher expense ratio than a passively managed fund, such as an index fund - although it may be comparable to other actively managed funds.

Not all TDFs created equal. Different fund managers may manage risk differently. Even if two TDFs share the same target date, that doesn’t mean they will have similar investments. And this is important for a potential investor to understand before making a decision.

If your 401(k) offers a TDF, don’t hesitate to ask your financial advisor how the fund is structured and how often it’s rebalanced. And remember that even though you can “set it and forget it” when it comes to TDFs, you’re not locked in permanently. So do your research and see if this approach might be a good fit for you.



What is Risk Tolerance and Why Does It Matter for Your 401(k)?

What is Risk Tolerance and Why Does It Matter for Your 401(k)?

Risk tolerance is a term you may have heard about when determining your investment strategy. While you might picture activities such as rock climbing or jumping out of an airplane when you think of risk, it has a different meaning when it comes to investing.

Risk tolerance refers to how comfortable you are with volatility and periodic downturns in your investment portfolio. Investments come with a wide variety of associated risks. On the low end of the spectrum might be an FDIC-insured savings account, where you’ll have the confidence of knowing exactly how much money you’ll receive from a fixed interest rate — and a federally backed insurance program to protect your earnings should your bank go belly up.

At the other extreme are more speculative investments, whose value may rise and fall dramatically depending on market- and industry-specific conditions. While risk is somewhat in the eye of the beholder, many would point to things like cryptocurrency, investments in emerging markets or speculative technologies as among the riskier options available. And, of course, there’s every type of investment in between.

Even within a particular class of investments, the degree of risk can vary. Bonds are a good example. Bonds are rated in terms of the likelihood that the issuer will make good on their promise of payment. Bond rating agencies such as Standard and Poor’s (S&P) and Moody’s evaluate the credit risk of the issuers and assign letter grades accordingly — from AAA to C or D — depending on the agency. U.S. Treasury bonds are among the highest-rated bonds, whereas junk bonds are poorly rated.

Investment volatility is a double-edged sword because the opportunity for high growth typically requires some willingness to accept the risk of significant loss. And while it’s unlikely any investor would have an issue with unexpected gains, quite a few have trouble dealing with major losses. Selecting investments that are appropriate to your comfort level with the possibility of losing money from time to time is an important part of developing an individualized investment strategy.

Financial advisors often ask a number of questions to help gauge an investor’s risk tolerance. The advisor might inquire whether their clients had lost sleep or had trouble coping during previous downturns. They might also ask how much money they’re willing to lose for the chance to achieve high gains. Behavior such as checking investment status on a daily or weekly basis might also indicate a lower risk tolerance. You can also find useful quizzes online to help you determine what your risk factor is when it comes to your investments.

Once you’ve evaluated your risk tolerance, it’s critical to make sure that the asset allocation of your portfolio is appropriate for that level of risk. The amount of time you have until retirement is also an important consideration to keep in mind when evaluating investment risk. Generally, the closer you are to retiring, the less risk you should take since your investments will have less time to recover from any potential losses.

Suffering significant investment losses after retirement can compromise your standard of living once you no longer have an income — and this factor may even override your own personal risk tolerance if you’re an older worker making investment decisions. Younger investors, on the other hand, with more time until retirement, may have greater latitude in choosing just how risky they want their investments to be.

It’s wise to sit down with your financial advisor periodically to reassess your risk tolerance and help ensure that your investments continue to be appropriately allocated for your current level of tolerable risk.

How Much Should I Contribute to My 401(k)?

How Much Should I Contribute to My 401(k)?

The employer-sponsored 401(k) has largely replaced the company-funded pension plan as the primary source of retirement savings for most Americans. Unlike a pension, however, 401(k) benefits are not automatic. Employees must choose whether or not to participate and then decide how much to contribute and how to best invest their contributions.

One of the most important decisions you can make is how much of your earnings to contribute to your 401(k). While the answer to this question depends on your retirement goals, timeframe and income, there are some general guidelines to keep in mind.

Where to Start

Many experts agree that while anything is better than nothing, most workers should shoot for contributing at least 10% of their income to a retirement plan. It’s particularly important to invest enough to take full advantage of any matching contributions that your employer offers.

A matching contribution refers to any money that your employer adds to your retirement account that’s contingent on your own contributions. Sometimes, this is a dollar-for-dollar match. Other times, it may be $.50 on the dollar or some other percentage up to a given amount. Whatever the formula for your company’s match, you should try to invest enough to earn the maximum match offered. This is because the company match is essentially “free money” — and you won’t find a better deal than that anywhere in the investment universe.

Raise the Bar

Once you’re investing enough to benefit from the maximum company match and have gotten your contribution rate up to 10%, challenge yourself to raise the level even higher. Many experts recommend contributing 15% to 20%. If you start investing from the beginning, those early contributions have the greatest potential to grow.

Automate Contributions

Some companies offer automatic acceleration programs that gradually increase the amount of your contributions over time. Speak with your HR or benefits department to see if you can enroll. By making contributions and increases automatic, you can improve your chances of staying on track to fund a comfortable retirement for yourself.

While you may feel it’s challenging to put money aside from your paycheck, many workers find that automatic deductions allow them to acclimate their budgets relatively easily. And if you make it a habit to raise your contributions every time you get a pay raise, you’re less likely to feel like you’re taking a hit.

What If?

If you’re worried about committing to those contributions with each paycheck, don’t be. You can always stop or reduce them. Just because you set the contribution level at 15%, that doesn’t mean you have to keep it there. You may be able to change your contributions online or through your benefits department.

Contributing regularly to your 401(k) can be one of the most important things you do to prepare for a secure retirement. But it’s important to start early and contribute sufficiently to meet your goals. It can be extremely helpful to speak with a qualified financial advisor to help determine what makes sense for you.

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