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Building an Emergency Fund – Lexington Law

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Most everyone experiences financial difficulties in their lives, and that’s precisely why financial advisors and financial planning experts recommend individuals build an emergency fund. An emergency fund is a personal savings reserve set aside in the event of future unexpected expenses or mishaps.

Emergency funds should always be available as liquid assets so that you can access them at a moment’s notice.

Why Do I Need an Emergency Fund?

While no one wants it to happen, unfortunately, financial hardships or enormous unexpected costs sometimes occur. For example, people are suddenly let go from their jobs due to recessions, or their cars break down or they incur significant medical debts after an accident or diagnosis.

Whatever the reason, the one consistent factor is that these are always a surprise.

According to the 2017 Report on the Economic Well-Being of U.S. Households, approximately 40% of Americans couldn’t cover a $400 emergency. And one in three Americans has zero budget for car repairs. Considering how likely it is that a $400 emergency or car repair will occur at some point within your average year, this is highly concerning.

Without an emergency fund in place, you might turn to dire solutions. For example, you might go to a payday lender, who would have very high interest rates. Or you might not be able to pay rent and be evicted.

Whatever the case, even a small setback, like an unexpected bill, can often send someone spiraling into debt. An emergency fund is like a shock absorber for setbacks in life.

How Much Money Should Be in My Emergency Fund?

There is some debate about exactly how much should be in your emergency fund. Ultimately, it’s an entirely personal decision. For example, someone who is in contract work or works for themselves may want to build an emergency fund that’s larger because their income stream is less reliable than that of a traditional job.

Ideally, you want to have around six months’ worth of living expenses saved up. If you lose your job, it can take you several weeks or months to find a new position. You want to have enough money saved up that you can comfortably handle losing your job or large expenses being thrown your way.

Where Should I Keep My Emergency Fund?

Ideally, you want to keep your emergency fund in a savings account. You don’t want the money locked up in investments. It should be accessible immediately to you, without penalty. You can also make your emergency fund work for you. Put it in a high-interest savings account (HISA) rather than a regular savings account so it earns interest as it sits there.

Another tip to remember is that you should keep your emergency fund in a separate bank or account from your regular accounts. If you see your emergency fund every day, you may be tempted to dip into it for nonemergency situations.

How to Start Building an Emergency Fund

It may feel overwhelming when you think about how to build an emergency fund. However, if you tackle it step by step, the process becomes a lot more manageable.

Set a Reasonable Goal

First, it’s important to set an end goal. When you know what you’re working toward, it’s much easier to track your progress.

Decide how many months of living expenses you want to save up for. Consider factors like your job stability, the amount of your previous unexpected expenses and your risk tolerance. Other variables should be considered too.

If this has been an incredibly expensive year for you, you could choose first to build up three months’ worth and then work your way up after that.

Next, calculate your average monthly living expenses. We suggest opening all your accounts and combing through the last four months. This will give you a rough idea of how much you typically spend per month. Make sure to only include the bare necessities. Then, multiply your desired months by your typical monthly expenses, and you’ll have a goal to work toward.

Make sure your goal is reasonable—if you choose an unattainable goal, you’re more likely to get discouraged along the journey.

Track Your Budget

Next, you will want to figure out a budget and stick to it. You should have an amount you want to set aside for your emergency fund every month so you can meet your desired goal.

Use an app like Mint or YNAB to track your money. That way, if you ever fall short of your goal, you can analyze your spending to see where you can cut back.

Make It Automatic

If you receive direct deposits, you can set up automatic transfers for your savings. This will allow you to regularly contribute to your goal without thinking about it. You also won’t be tempted to spend the money because you won’t see it sitting in your bank account.

Put Away Any “Extra” Money

Chances are, throughout your year, there will be times when you come into some unexpected cash. This could be from birthday presents, bonuses or tax refunds. Make a promise to yourself now that when you get this money, you will put it into your emergency fund.

Sell Something

Take a look around your home and see if there’s anything you can sell. There might be clothes, old electronics or furniture that you can get rid of. This extra income can build an emergency fund much faster (and simultaneously declutter your home).

Modify Your Expenses

Don’t feel like you need to cut out all discretionary spending, because if you budget too aggressively, you might just end up giving up on the project. Instead, choose to eliminate just one thing, like eating out. A small change can add up over the months and help you grow your fund.

And don’t forget to take a look at your fixed expenses to see if there’s room for budget cuts there too.

Reward Yourself (Occasionally)

Building up a large emergency fund will take a lot of discipline and commitment. Over time, as you put all your extra money into your fund, you might start to feel discouraged.

To avoid this situation, set up mini goals along the way. As you achieve these goals, you can reward yourself. For example, every time you hit another 10% milestone toward your final goal, you could treat yourself to a movie night or a Starbucks drink. This will help you have something to look forward to along the journey.

Use Credit Repair to Your Advantage

Credit repair has the power to reduce financial stress and contribute to your overall savings. As your score increases, you’ll be given new advantages you can use to achieve your goal.

  • Interest rates. Better credit equals lower interest rates for your credit cards. If you’re now paying less in interest, you can pass the savings on to your bank account for an instant emergency funding method.
  • Fees. Your budgeting app can set reminders for you so you never incur late fees again. Whatever you save in late fees can go to your emergency fund instead.
  • New benefits and rewards. Individuals with outstanding credit are often given access to the best interest rates and credit accounts. They receive benefits such as frequent flyer miles, cash back and shopping discounts. You can use these perks to continue to save in new ways and build up your emergency fund.

Your Safety Blanket

Your emergency fund is a saving grace when disasters in your life occur. It might be challenging to build it up, but you’ll be glad it’s there once you have it. Make sure to clearly define for yourself what constitutes an emergency.

And, if one occurs, don’t be afraid to dip into the fund. If you do use some of the funds, restart the journey to building it back up. This way, you’re always protected.


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?

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couples credit history

While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.

Users Who Are Authorized

An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.

If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.

Joint Credit Cards Have an Impact on Your Credit Score

Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.

Accounts Individuals

Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.

Considerations

While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.

Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.

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Should you pay down debt or save for retirement?

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rebuilding credit

While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.

Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.

If you have high-interest debt, pay it down

When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).

In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.

High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.

To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.

If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.

Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.

If you’re nearing retirement, start to save

The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).

Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.

Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.

Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.

Aim for both goals by improving income

As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.

The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.

If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.

For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.

While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.



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How does a loan default affect my credit?

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loan default

Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.

Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.

30 days late

Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.

The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.

More than 30 days late

Payments that are more than 30 days past due can trigger increasingly serious consequences:

  • The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
  • You may receive phone calls and letters from creditors demanding payment.
  • If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.

Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.

Other ways a default can hurt you

Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:

  • If you default on a car loan, the creditor can repossess your car.
  • If you default on a mortgage, you could be forced to foreclose on your home.
  • In some cases, you could be sued for payment and have a court judgment entered against you.
  • You could face bankruptcy.

Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.

How to avoid a loan default

Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:

  • For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
  • For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.

Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.

Clean up your credit

The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.

Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.



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