The S&P 500 was up slightly last week and is nearing the all-time high set earlier in the year.
The increase in interest rates earlier in the month is a boost for savers. There are two types of savings that everyone needs to have. The first is for emergencies, like a job loss or illness. Prior to the ’08-'09 financial crisis, a typical recommendation was for three months of living expenses. As we see the time to find a comparable job increase, we’ve pushed up our recommendation to six months of living expenses. That’s a lot of money, and can take time to build. It’s also often too much to have sitting in cash.
We suggest building to $25,000 in a high-yield savings account or money market. These accounts should be paying over 3% right now, and are fully liquid, meaning you can get to your money any time without penalties or fees. Anything over that can be invested in a regular investment account, with the potential for higher returns.
The other type of savings is for expected but irregular expenses. Think of car maintenance. If that’s normally $1,200 a year, it probably isn’t $100 a month. So, January and February come and go, with no car maintenance bills. But then in March, you need $500 worth of work. Depending on your income, that $500 may have to go on your credit card, because you hadn’t been saving the $100 a month, you were spending it. This is the difference between budgeting and managing cash flow.
If your income doesn’t allow for these irregular expenses without planning, begin by making a list of them. Anything you know that you will spend but that isn’t a regular monthly bill. Divide that total by the number of paychecks you have and begin transferring that every paycheck to your savings account. It may be easier if you alternate this savings, with your rent or mortgage coming out of one paycheck, and this savings coming out of the next. Some people find it easier to have two accounts – one for true emergencies, that initial $25,000 mentioned earlier, and one for these normal but irregular expenses.
There are many ways to manage it. The key is to consider both emergency savings and saving for expected expenses as part of your monthly bills.
Your action item this week is to check your tire pressure. As cold weather hits, tires can be under-inflated, leading to increased wear and lower gas mileage.
If you have a question you want answered, email us at info@covingtonalsina.com. Be sure to check out our Facebook page or website to see our upcoming educational events.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.