With many of the COVID-19 2020 & 2021 tax relief provisions expiring, many taxpayers were surprised by a higher-than-expected 2022 income tax bill. In some cases, this also meant a balance was due with the tax return for the first time in a few years. Benefits such as the expanded child tax credit, expanded unemployment payments and stimulus payments have discontinued leaving many individuals and families with less cash available for unexpected expenses.
In cases like this, we are reminded of the importance of an emergency fund. An emergency fund is money in an account, traditionally a bank account, that’s set aside for life’s unexpected events and expenses, such as medical bills, car repairs or home repairs. These funds are specifically earmarked for unexpected bills and can reduce or eliminate the need for reliance on high-interest credit cards or personal loans. An emergency fund is an essential part of a solid financial plan.
We are often asked, “How much should I save in my emergency fund?” A good rule of thumb is that the more stable your income and household are, the less you need in your emergency fund. According to Ramsey Solutions, if you’re part of a two-income household or you’ve had a steady job for several years, then three months of expenses in your emergency fund is probably fine. But if you’re a one-income family, you’re self-employed, or you earn straight commission, then a six-month emergency fund is better for you since a job loss could severely affect your ability to pay the bills.
It may go without saying, but your emergency fund should be highly liquid. When it comes to where to set aside these funds, the most important thing is that you can access the funds quickly to avoid unnecessary stress during what is most likely an already stressful time. Using a savings account connected to a checking account is a good option or a money market account that comes with a debit card or check-writing privileges. It is also recommended that the funds not be too easy to access either!
Before tapping into your emergency fund, ask yourself these three questions: Is it unexpected? Is it necessary? Is it urgent? The more you answer yes, the more likely the situation you’re in is an emergency and justifies using money from your emergency fund. Paying your tax bill certainly is necessary, fairly urgent, and without proper planning, is often unexpected.
Finally, some tools to kickstart your emergency fund include making a budget and sticking to it! Also, selling some unneeded personal items, through social media for example, is another way to get that emergency fund started. Boost your income by taking on a part-time job or starting a side-business. Peace of mind and the feeling of being able to breathe easier knowing you have a safety net in place are well worth the small sacrifices needed to have this extra security.
It goes without saying that your tax professionals at Tronconi Segarra & Associates are here to help – whether it is planning for life events, helping you adjust your tax withholdings or just discussing your overall financial plan, so please do not hesitate to reach to me, Lisa A. Mrkall, CPA, MBA, Principal, at 716.633.1373 or lmrkall@tsacpa.com, or your specific Tronconi Segarra & Associates’ tax advisor.
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