- By Kerry Hannon
Editor’s note: This article is part of a Next Avenue special section about women age 50+ managing their money.
During last week’s 90-degree days in Washington, D.C., the air-conditioning unit in my home went kaput.
The fan merrily blew hot air, but not a breath of cool slipped through the vents. As the indoor thermostat climbed and my dog began to look miserable, the solution was simple: Call someone to repair the air conditioner, pronto.
The bad news that followed was that the nearly 20-year-old unit couldn’t be fixed and the cost to install a new one would be a sizzling $6,000 or so.
Unexpected? Yes. Unpleasant? You bet. Unprepared? No.
How My Emergency Savings Saved Me
I have an emergency fund in a money market savings account for precisely this kind of out of-the-blue problem and I keep enough cash in it to cover more than a year of daily living expenses. And by all accounts my new AC unit should last at least 15 years.
For a work-at-home gal like me on a hot, sticky summer day, I was mighty grateful for my rainy day fund.
But many women around my age – in their 40s, 50s and 60s – aren’t as ready for a money emergency.
Puny Rainy Day Funds
The recent Women’s Financial Survey from the Credit Union National Association revealed that roughly 59 percent of women age 45 to 60 don’t have an emergency fund that would cover their expenses for even six months. And only a hair more than a third (36 percent) of women ages 44 to 53 do.
Most men aren’t braced for emergencies either.
Earlier this summer, a Bankrate.com survey of 1,004 American adults found that fewer than 1 in 4 (24 percent) have enough savings in a checking, savings or money market account to cover at least six months of expenses. Half have less than three months' saved up; 27 percent have zilch in reserve. Those numbers have barely budged in the past three years, incidentally, even though the economy has improved.
How Much Is Enough?
Unplanned expenses can be shocking and squirreling away money for them can be tough. But how much is enough to set aside? The equivalent of three months’ daily living expenses? Six months? A year? More?
(MORE: Tool: How Much to Keep in Emergency Savings?)
“Six months is a good benchmark to avoid falling into financial ruin when life throws us a curve,” says Paul Gentile, executive vice president for the Credit Union National Association.
Tom Orecchio, a certified financial planner with Modera Wealth Management in Westwood, N.J., agrees. “If you are working and have a relatively secure job and a steady paycheck, six months of emergency funds is likely enough to keep on hand,” he says.
My One-Year Rule
Personally, I don’t think that’s adequate, particularly for women in midlife. With health care costs rising and the average length of unemployment lasting nearly a year for workers 55 and older, I recommend salting away at least a year’s worth of daily living expenses.
Retirees should aim for even more of a cash reserve.
“If you’re in retirement and dependent on regular withdrawals from your investment portfolio, your reserves should cover two to three years,” Orecchio says. “I know that sounds like a lot, but if we have a 2008-09-style downturn, the worst thing you can do is withdraw funds from a falling portfolio.”
He’s got a point. Having a cushy cushion lets you give your investments a chance to regain their value as markets calm and start heading up again.
(MORE: Managing Emergency Cash Reserves)
3 Emergency Savings Tips
Here are three tips money pros offer to women who want to build sturdy emergency savings funds:
1. Stay liquid. Think of this as the financial advisers’ version of the “Stay thirsty, my friends” line from Dos Equis’s "Most Interesting Man in the World" commercial.
Emergency funds typically belong in bank accounts or money market funds that don’t fluctuate in value and are easily accessible by check, ATM or teller window (liquid accounts), Orecchio says.
That advice is echoed by Zaneilia A. Harris, a financial planner who is president of Harris and Harris Wealth Management Group in Upper Marlboro, Md.. She also suggests putting some of your emergency cash in bank CDs with maturity dates of six months or less so you can eke out a little more interest (they currently yield up to 1 percent).
Generally speaking, you’ll probably find the highest rates at online banks and credit unions. A great place to comparison shop is Bankrate.com.
I keep my emergency stash in a federally insured money-market account where I can make withdrawals at any time without penalty.
It’s now paying .84 percent, which is actually terrific considering these accounts now offer .05 percent to .86 percent nationwide, according to Bankrate.com. Interest-bearing checking accounts have similar yields, according to DepositAccounts.com.
Before socking away money in a bank account billing itself as high-yield, check to see if there are any restrictions. There may be fees for withdrawing money more than a set number of times each month or a monthly-balance requirement.
Orecchio also recommends keeping some cash at home in case you need money in a flash and can’t get to the bank. “Not much, but if possible, a week or two of cash expenses would be great to have on hand,” he says.
2. Red light: plastic. Green light: home equity line. You may be tempted to turn your credit card into a source of emergency funds, through a cash advance. Don’t do it.
You’ll likely be slapped with onerous revolving interest charges, since there’s typically no grace period on cash advances. The average cash-advance rate is now a stunning 21.75 percent, according to Lowcards.com.
My planner pals concur. “I am not a fan of credit-card advances because the cost of interest is incredibly high and they’re a drain on resources,” Orecchio says.
He does, however, recommend homeowners have home equity credit lines available for emergencies. Today’s average annual rate: roughly 5 percent.
3. Use “found” money to jumpstart your emergency savings. Harris advises women who need to start or rebuild their rainy day funds to earmark their tax refunds and, if they get bonuses at work, to set them aside for this purpose, too.
One great way to trick yourself into saving that I’ve found useful over the years is to set up automatic transfers each month from your checking account into a money market account or another savings account. That way, you don’t need to remind yourself to sock money away. You can start by transferring small amounts and then ratchet up over time.
When you adopt this out-of-sight, out-of-mind technique, you won’t have to wrestle over whether you can get by that month without the money. My bet is you can.