Dear Clients and Friends of Cornerstone:
According to some sources, 80% of us will fail to keep our New Year’s resolutions by the second week of February. For those of you who may have financial resolutions to develop a spending or debt reduction plan for 2018, this month’s article will help you stay on track. A rainy day fund will help you weather any unexpected financial setbacks, and even a modest start to your fund will help you cover those expenses.
If you would like to refer back to any previous newsletters we have published, you can find them on our website. Please be sure to visit www.ccadvisors.com.
– Cornerstone Capital Advisors
Among the nearly 7 in 10 adults who plan to make a financial New Year’s resolution, 40 percent have a goal of setting and following a budget, according to a forthcoming report from the National Endowment for Financial Education. Getting out of debt is a resolution for 39 percent, while 32 percent want to establish savings and 31 percent hope to boost their retirement savings.
The organization polled 2,165 U.S. adults in mid-December.
“We have to change our mindset and realize that these expenses are not if they will happen, but when they will happen. Emergency savings can alleviate uneasiness.”
But there are plenty of roadblocks to meeting those goals: Sixty-three percent of those surveyed said they experienced a “financial setback” in 2017. Common financial shocks included transportation (23 percent), housing repairs or maintenance (20 percent) and an inability to keep up with debt payments or bills (16 percent).
That trend could easily be repeated in 2018, with Americans expecting their three largest expenses to include paying off debt, home expenses (excluding their mortgage) and transportation expenses.
“We have to change our mindset and realize that these expenses are not if they will happen, but when they will happen,” Ted Beck, president and CEO of NEFE, said in a statement. “An emergency savings, even a modest amount as a starting point, can alleviate uneasiness.”
Here’s how to prepare to better weather financial setbacks in 2018, without giving up on your New Year’s resolutions.
Create a savings floor
Financial advisors typically recommend building to have three to six months’ worth of expenses set aside. But even a small rainy-day fund can help, said Pamela Capalad, a certified financial planner and founder of Brunch & Budget in Brooklyn, New York.
“Have the floor on your savings be $400 or $500,” she said.
That’s enough to cover a moderate unexpected expense — so you don’t need to pull out your credit card and set back your other financial goals, Capalad said. Aim to replenish those savings quickly if you do need to tap them.
In foundation’s survey, 36 percent of consumers said they would need to use credit to cover an unexpected expense, versus 31 percent who would use emergency savings and 28 percent, cash.
Some financial shocks aren’t a surprise, said Kevin Meehan, a certified financial planner and the regional president of Wealth Enhancement Group in Itasca, Illinois.
If you can see, for example, that your aging refrigerator is acting up or that your kid is probably going to need braces, use that as an opportunity to reassess spending and build savings to help handle that eventual expense.
“If you see something coming, that’s where you go back to need versus wants,” Meehan said. “You’ll have to weigh putting off discretionary purchases in favor of preparing for that.”
Assess your resources in the event of an unexpected financial setback, he said. It helps to know what assets you have available to use, and if you must take on debt, which avenues (such as a home equity line of credit or a zero-percent balance transfer offer) might be least damaging.
Stop the cycle
“People end up being trapped in the credit card cycle, where they are constantly catching up,” said Capalad.
Breaking out requires a concerted effort. First step: Curtail new credit card debt.
Shift recurring purchases to a debit card or checking account, she said. Do the same with discretionary purchases that can add up fast, such as ride-sharing or takeout delivery.
Then come up with a plan for tackling your existing debt.
Focusing on your most expensive debts first can help you pay less in interest and speed repayment, said Meehan. But pay attention to timelines, too, such as an end to balance-transfer or deferred-interest offers. A looming deadline can make those debts a higher priority.