Long-term savings: Why you need an emergency fund, and how to start one today.

We’ve talked about short-term savings and gave you some practical tips on getting started. Here, we’re going long! If you don’t have a plan for long-term savings, there’s no time like the present to start building your fund.

The long and short of it

Before we go on, it’s important to distinguish between long-term and short term savings, and why we need to create long-term funds. Long-term savings are funds that will sit in reserve for a long time (one to three years), while short-term savings may be used within a year. Typically, long-term savings are used for expenses larger than what we would use short-term savings to fund, such as unforeseen medical bills, a costly home repair, living expenses during a period of unemployment, or retirement.

Creating a long-term savings account gives you peace of mind when circumstances in your life change. It’s a great way to finance expenses that may not be covered by car, home, or health insurance, or to pay for deductibles.

And now, a few commonly asked questions about long-term savings:

Q: How much do I need to start an emergency fund?

A: A good starting point is $1,000. If you don’t have $1,000 to set aside, set that as your first goal. Your banker can help you set up a savings account labeled “emergency fund.” Many banks offer a service that automatically transfers money from your checking account to your savings account on a set schedule.  Fidelity clients may enroll in the Smart Cents Savings program to sign up for automatic transfers. You can start saving with as little as $1 a week.

If you aren’t living from paycheck to paycheck, consider saving 5 to 10% of each paycheck for your emergency fund. You’ll be amazed by how quickly this will add up, and it’s likely that you won’t even miss that money.

Q: How do I determine what my long-term savings goal should be?

A: A good rule of thumb is to have 3 to 6 months of living expenses saved. When reviewing your budget, be sure to include all of your expenses. Line items such as gas for your car, taxes, clothing, prescriptions, or food and medical care for pets, can be overlooked if you aren’t thorough. This emergency fund will be your source of income if you lose your job or need to take a unpaid leave of absence, so you’ll want to be sure that you have enough saved to cover expenses beyond mortgage or rent, and utilities.

Q: Does the 3-to 6-month rule apply to people who work on commission, too?

A: If you’re a commission-based professional like a real estate agent or an insurance broker, you should have 12 months of living expenses set aside because of the natural fluctuation in your income.

Q: How can I achieve my savings goals without feeling deprived?

A: You may want to approach saving money the same way you would approach developing healthy eating habits. If you go on diet that is too restrictive, you’ll be tempted to cheat, eat an entire box of chocolate, and derail your efforts. The same holds true for saving money. If you deprive yourself of too many things in order to save, you’re setting yourself up for failure in the same way. Eventually, you’ll be tempted to eat the whole box of chocolate, or in this case, go on a spending spree, and undo all your hard work. Total deprivation is not the answer. Take a healthy approach to saving. Be kind to yourself. Start small. And set yourself up for success with establishing reasonable goals.

Review your monthly bank statement to see where you’re spending money, and where you can save in the future. The morning coffee run is often used as an example of a good place to save. If you buy 2 cups of coffee a day at $2.50 each, 7 days a week, that adds up to $35 a week, or $1,820 a year. That’s more than enough to start your long-term emergency savings fund.

Coffee is just one example. You may be surprised by how much you’re spending on lunches, or movies, or drinks with friends. Of course, you don’t want to eliminate these things from your life, but maybe you could scale back by brown bagging it a couple days a week, or going to a matinee instead of a late-night movie. Much like a diet, you’ll be more successful if you just let yourself have a piece of candy once in a while. It’s ok as long as you don’t eat the whole box.

Q: Should you give yourself a deadline?

A: Definitely not. Don’t put a time restriction on this. You may want to save $1,000 in a month, but that may not be practical. You still have to pay your bills and live your life. Just save as much as you can when you can, and resolve to be ok with that.

A Few More Savings Tricks & Tips:

• What will you do with this year’s tax refund? If you don’t have a plan for these funds, why not take at least a portion of it and put it into your long-term savings account? Another great way to spend your refund is to pay down your credit card debt. Once your credit card is paid off, take the amount you used to spend on your monthly payment and put it into your emergency savings fund.
• Use cash. Some people find that they spend less money when they pay with cash. If your goal is to save money, put your debit and credit cards away and see if this system works for you.
• Always replace the funds you borrow. When you dip into your emergency fund, it’s important that you continue to save and rebuild this financial cushion so you are prepared the next time a situation arises.

Let’s talk! Fidelity Bank has multiple local branch offices throughout Northeastern Pennsylvania and the Lehigh Valley, and our full-service Client Care Center is at your service 7 days a week. Call or visit your local branch office today.