If you want to know what you value when it comes to money, check your bank and credit card statements, and you will see. Where we spend money and allocate financial resources directly reflects what we value when it comes to money.
There is no better way to see those values play out than Americans' actions when receiving stimulus checks and child tax credit checks. The Pandemic has had one bright spot - it has shifted the way people value money. The height of the Pandemic was a crucial time to have an emergency account and get out of debt. Unfortunately for most Americans, heading into the worst Pandemic of our lifetime, consumer debt increased, and savings decreased
As a result, Americans spoke loudly with their choices given the stimulus checks. Of course, there have been many rounds of stimulus checks and now monthly child tax credits. Consistently 40% to 45% paid down debt, 32% saved the money, and 27% spend the money. For those who spent the money majority of that was for necessities and not the big-screen television. There is nothing like a pandemic to get your financial attention.
Out of those three choices, I think the saving choice is the most important. Once you reach your savings/ emergency find goals, then it makes sense to tackle debt.
So, how much should you save for emergencies?
The textbook answer to that question, of course, is six months of income. I like to look at it differently by intentionally dividing an emergency account into three categories.
The first category is income replacement. How much income would be needed to replace unemployment benefits after being paid, and for how long? The amount could be anywhere from 6 to $10,000, depending upon the length of time you want to cover.
The second category is an unexpected financial event such as a home or car repair. I would set aside $5000 for this emergency surprise.
The third category is health insurance deductibles. What is the total amount of you're out of pocket deductible for your family? Unfortunately, this could be as much as 10 to $12,000. It just depends upon your policy.
If you total all three categories, you could be looking at an emergency account a 25 to $30,000. Some people may think it is unattainable after calculating that number. The bottom line is to practice this financial habit of saving for emergencies regardless of how. Save as much as you can save each month. Anything saved when a financial emergency occurs will be welcome.
Need a second opinion about money and investment issues? Just ASK BOB! Bob is available and always happy to share his views.
Bob Brooks is a Financial Adviser and host of The Prudent Money Radio Show, aired daily at 3 PM CST on 91.3 FM, 97.5 FM, and 99.9 FM in the Dallas Forth Worth metroplex. Listen online at www,prudentmoney.com/radio-show. You can reach Bob at 972-386-0384 and online at email@example.com.