As inflation continues, it’s more important than ever to plan for the unexpected. Dr. Cathy McCrary, assistant professor of accounting at Georgia Gwinnett College, shares the importance of having an emergency fund set aside for the unforeseen and the impact that inflation can have on your savings.
“Inflation decreases purchasing power, or stated differently, in times of inflation a dollar doesn’t stretch as far as it used to,” said McCrary. “By this, I mean that having a stash of cash for emergencies is even more important during times of inflation.”
“We’re feeling the results of the perfect economic storm,” said McCrary. “Compound the economic effects of the pandemic with the war in Ukraine, plus our personal unexpected emergencies – air conditioning repairs, car breakdown, or accident or illness resulting in huge medical bills and/or lost pay – and suddenly, you’re in a serious financial crisis.”
That’s where an emergency fund comes into play.
“It doesn’t have to be hundreds of dollars squirrelled away with each paycheck, but it’s important to set aside a certain amount consistently, preferably through automated recurring transfers. You never know when you’ll need it, but you’ll be happy to have the financial cushion when the need arises,” said McCrary.
“It’s important to keep your money in an account that’s relatively inconvenient and safe from impulsive spending.”
McCrary’s idea of a sufficient cushion is having enough to handle one or two of those unforeseen events without placing you in immediate financial distress. And saving isn’t necessarily something you have to do alone.
“Involve the family in making a savings plan to get everyone’s buy-in,” said McCrary. “For example, if your kids talk about wanting to go to Disney World, then include them in calculating the trip’s cost and encourage them to contribute part of their allowance, chore earnings or summer job pay towards the cost of the trip. Including children in goal setting and planning will help them learn the value of a dollar and the benefits of delayed gratification, while teaching them how to save.”
McCrary also discussed credit card debt, which she said often detracts from the ability of consumers to save. To tackle credit card debt, McCrary suggests the following strategy:
List each consumer credit account you have, the amount you owe for each, the minimum monthly payment and APR for each. APR is the annual percentage rate – that is, the interest rate you’re being charged for the debt.
Pay as much as you can reasonably afford on the account with the highest interest rate while making the minimum payments on the other accounts.
Once the balance with the highest interest rate has been paid off, take the amount you were paying on it, plus the minimum payment of the balance with the second-highest interest rate and apply to that balance.
Once the balance with the second-highest interest rate is paid off, apply this same strategy to the balance with the third-highest interest rate and so on.
Along with eliminating credit card debt, McCrary suggested other dollar-stretching strategies, including:
Make and take your lunch and/or breakfast to work.
Plan meals ahead, shop based on your plan, and cook. You’ll have fewer trips to the grocery store.
Use a cosmetology or barbering school for discounted grooming services.
Purchase a water filter for the kitchen sink. Check the label. Bottled water is usually filtered tap water.
Avoid recurring fees – late fees, ATM fees, monthly fees.
Use the public library to borrow books and movies at no cost.
Keep up with your vehicle’s routine maintenance schedule.
Maximize fuel efficiency – slow down, work from home, keep your car’s maintenance schedule, get the junk out of your trunk.
With a good cushion in place, increase insurance deductibles which in turn will lower insurance premiums.
“The key here is focus,” she said. “Using the money that you save from these strategies can help stretch your dollar and bolster your emergency fund.”
Original source found here.
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