How to Help Clients Manage Emergency and Retirement Funds

Every day, accountants are asked for advice by their clients on how to manage debt, and as debts grow and financial burdens hit the home front, more and more Americans are left in the unsettling position of financial insecurity and stress. The vision of fun times out with friends and the desired vacation to escape everyday life is becoming more and more unattainable. On top of that, retirement plans and hopes take a backseat to surviving in today’s rough economy.

Reflecting these trends, a 2013 Employee Financial Wellness Survey conducted by PwC of more than 1,600 American-working adults discovered that the top two financial concerns are 1) not having enough emergency savings for unexpected expenses and 2) not being able to retire when they want to.

According to Pew Research, which tracks social and demographic trends, around one third of respondents said they had a financial emergency or unexpected expense that affected them significantly. The most common are related to medical, car and housing-related emergencies. While each situation is different – and there isn’t a perfect solution to anyone’s dwindling finances – developing and staying true to an emergency fund can certainly help.

On the other hand, mismanaging your emergency fund or becoming too obsessed with it can be your downfall. While financial experts will tell you that keeping three to six months of living expenses is ideal, the Consumer Federation of America discovered that the average cost of unexpected expenses annually totals about $2,000 per household. Under the so-called “experts” plan, you will be saving $9,000 to $18,000 per year, an amount many people can’t save, and for the average cost, don’t need to save.

Putting too much money into an emergency savings doesn’t make much sense either because it won’t be earning you a good return.

How can you help your clients with their options? Here are some other situations where it is more economically beneficial to put the emergency savings plan on the back burner:

Credit Card Debt. Going all out on your emergency fund can be a good thing, but not at the expense of piling up credit card debt. Making the minimum payments to expedite your savings fund is not a smart strategy, and will put you in a bigger hole than before. In the end, focus on relieving yourself of these debts before pumping up your emergency fund for future shortfalls.

Investments. While many of us are paranoid about not having the money to cover unexpected expenses, you may already have an “emergency fund,” that you just didn’t recognize or label. If you have investments that allow you to retrieve money without penalty, you already have this fund. This sort of endeavor also brings you a greater interest rate on your money, and thus, will leave you in a better financial situation. This plan can be your meal ticket to a more comfortable retirement and a less stressful life.

Debt-free. This may be rare for the average American, but if you have managed to avoid debt, there is no reason to create an emergency fund. You don’t have the overwhelming thought of next month’s bill hanging over your head or not sleeping through the night, which hurts your work performance. Chances are, if you are suddenly faced with an emergency and don’t have enough to cover it, you can simply open a credit card or seek a loan for the temporary hurdle, and then repay it.

Last advice for clients: Before they let debt get too out-of-hand, ask them to assess their situation and make the decision that benefits them the most. Whether it’s to take care of a current problem or avoid one in the future, an emergency savings fund may be the answer … but more than that, they need to create the opportunity to make more money, while also taking care of financial payments as soon as possible. Taking baby steps can help them have the retirement dollars when and where they want it.