Inflation makes it difficult to save money for a rainy day. Here are some tips

Many Americans have tried to save money for years, but inflation and high prices have only made the situation worse. There are funds, but it takes work. Budgeting and setting up direct deposits can help.

Many Americans are experiencing financial stress these days as they try to cope with high prices for various goods and services. Much of this anxiety reflects the lack of a safety net in the form of emergency savings.

There is no clear definition of how much savings you should have to cover unexpected expenses. Much depends on the stability of your job, your inclination to take on a side hustle, the amount of debt you have, what assets you could sell in a pinch, and so on.

Jane Scisor of Ceasor Insurance Consultants in Scottsdale said the traditional rule of thumb was to accumulate enough reserves to cover six months of expenses, but she now sees eight months or more as a more reasonable number to cover rising emergency medical costs . , unexpected tax bills and other liabilities.

How to Store Emergency Funds

You should have a small stash of currency that you can grab in a pinch, as if you were facing an imminent evacuation, but you don’t want to hold on to too much cash that doesn’t earn interest. You may prefer to keep your emergency funds in a checking or other bank savings account, money market mutual funds, or other interest-bearing instruments.

No matter how you hold your money, Stephen Conners of Conners Wealth Management in Scottsdale suggests labeling the account for emergencies only so you’re not tempted to use it to cover everyday expenses.

The American Institute of CPAs, in helping people affected by Hurricanes Helen or Milton, pointed out other ways to access money in a pinch. These include lines of credit, cashing out an insurance policy, or drawing money from a 401(k) or other retirement plan.

But there are caveats to this choice.

For example, permanently withdrawing from a retirement plan will likely incur taxes and possibly early withdrawal penalties, although many retirement plans allow you to borrow money without any tax consequences, as long as you repay the money on time. Typically, you can borrow up to 50% of the value of your retirement plan, or $50,000, according to the AICPA.

What’s holding people back

A majority of Americans say they are behind in accumulating emergency savings, with 62% saying they fall short, according to a mid-September Bankrate.com survey of about 2,500 people. Only 23% said they were on the right track, and only 15% thought they were ahead. 17% of respondents said they have no emergency savings.

Bankrate did not tell respondents what amount of savings was reasonable or appropriate.

Among respondents who did not increase their savings this year, 53% said high prices or inflation were the main obstacle, 43% said they had too many expenses, and 24% said they had too much debt. Other common barriers included changing jobs or income (18%), large unexpected expenses (15%) and high interest rates/borrowing costs (13%).

You may choose to set emergency savings as a New Year’s resolution, but it’s best to start now before the distractions of holiday spending arise. “Even if it’s just $20 a month or whatever the amount is, do it,” Conners advised.

How to get on the right track

It may be helpful to view emergency savings as another item on your list of regular monthly expenses. “Paying yourself first is a proven way to save,” said Greg McBride, chief financial analyst at Bankrate. Otherwise, he says, you may find that “there’s nothing left after you pay your bills.”

It offers to automatically transfer money from your paycheck to a special savings account.

Part of the savings process involves creating a budget so you can identify expenses that can be cut. Don’t forget to include insurance premiums, property taxes, or other large bills that you may not pay every month.

“It’s really important to know where the money is going,” Conners said. Part of the exercise, he says, involves distinguishing between needs and wants, necessities and luxuries.

Cesor suggests cutting back on regular monthly expenses that may not be necessary, subscriptions and other items that people “often forget are taken out of their checking accounts.” Other steps could be as simple as replacing your weekly lunch out with one you prepare at home.

The decision to create an emergency fund “often starts with recognizing the (budget) problem,” she said.

Budgeting can also involve finding ways to increase your income. Opportunities range from freelance work to part-time work as a tutor, delivery driver, nanny, dog walker or something else. Many of these positions become more numerous during the holidays.

What else can you do

Since emergency funds are designed for emergencies, taking other precautions can help offset the risks of burglary, fire or other disaster.

For example, the AICPA suggests making a list of your home furniture, appliances, vehicles and other personal items with their current value and updating the list from time to time. This can be useful if you decide to sell some items, and will also be useful if you have to file an insurance claim.

It’s also wise to keep a list of your financial accounts, as well as updated usernames and passwords, in case your cell phone or computer is lost, stolen, or damaged.

Another smart move: Get a copy of your credit report periodically to see what loans and liabilities are in your name; the list may be longer than you think and contain errors. You are entitled to one free credit report each year from each of the three major credit bureaus through Annualcreditreport.com.

Creating an emergency fund is not a particularly cerebral task, but it does require determination and discipline.

“I see it all the time,” Conners said. “A lot of people don’t think having (emerging savings) is as important as it is.”

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