Emergency Fund or Tax Savings Account

What to do with your money when you are sitting on enough to go “blow” it all on a property or flashy things. Have you ever looked at your bank account and wondered what you can do with all that money, then said “I know, let’s not let it go to waste and go spend it!” Trust me when I say that I still have those lingering thoughts and as I sit here it is still on my mind to spend some money and get another investment to double that money I have in my account(s). As I look at my accounts there are two different options to use when the money is sitting laughing at me because a part of me wants to use the money for something to double it. I am talking about money set aside for taxes and an emergency that comes up in life, and while it sits in the account(s) it’s very tempting to use for something else other than what it was saved for.

It is hard to always play it safe in life in terms of money because there are always shiny objects in life that come up that could double your money. Everyone has these challenges mentally, and what are these accounts used for and why keep them when there are ways to double the money. Think as if, you can use the money then go back into those accounts to replenish the money taken. In life there are choices and sacrifices on how to handle certain impulses, and there are some that revolve around money. How to resist the impulses and keep those great balanced money accounts for what they are intended for, and not use them improperly.

Fight the urge

First off, let’s talk about fighting the urge to go spend all the money you have down to the last penny and take that risk while going full tilt (aka spend all your money as quickly as you can into whatever you can). This is fighting the urge; you’ll need to have it when you have money just sitting in the bank account you selected for something else. This is money for a specific plan in place and going against that can create a larger challenge down the road, that is why it’s fighting the urge.

There are times that investors get the money set aside for a home for an investment, and then have reserves for the lender to see, but once the loan is closed and home is bought the funds go to something else that is a “shiny object.” The shiny object could be another investment, or a new car either way it’s gone. This urge needs to be fought back by will power.

Emergency Fund

What is the emergency fund, and why is it so important for investing and life? This is saving for a rainy day, saving for that job loss, that rental property that has a six-weeks of vacancy, the home that has a large roof leak, and the list goes on. This is for the unexpected that is around the corner and no one is going to see it coming, also known as Murphy’s Law. It’s the expect the unexpected because the unexpected will always happen.

There are a lot of different conversation on how much you need to have and what amount is the best for a person. This is something to be tailored towards the individual, or business. For a business the term is retained earnings, and the emergency fund if for the individual. The rule of thumb is three to six months of expenses in savings to make the emergency fund sufficient.

When you take all your expenses for the month which include groceries, mortgage/rent, car payments, gas, cable bills, insurance and other miscellaneous expenses. Once added up, they could equal $2,000 a month or $10,000 a month; you’ll take that month amount and multiple it by the months you want to float you along till you get income coming in if you lose that income. For the $10,000 example you’ll need $30,000 to $60,000 in your bank account for the fund. This stays in a place without being touched unit you lose the income.

Tax Savings Fund

The next account is saving for taxes if you work a 1099 job which does not provide taxes withheld as W2 employment has built in. What this means is that you do not get taxes pulled out of your paycheck, and you have to save for them to pay quarterly or at the end of the year during tax season. There are many different variables on having these savings and accounts for taxes. The variables are a combination of how much you make, how much your expenses are, do you have the income flow through a corporation, and are the monies that you get go directly into your own name at the end of the year.

The tax account(s) should be reviewed with your CPA or an informative CPA that will help you through how much you should be saving. The items above that we talked about should be something that is gone over with your CPA, which will help them distinguish what you should be saving for your estimates for taxes. Sometimes it’s easy to go off what you made last year; however, like the is saying goes “past performance is not indicative of future results” so do not be caught up in what you made last year, stick with getting updates from your CPA regularly. The rule of thumb for self-employed individuals is 25%-30% to save up for your account for taxes. This all depends on your tax bracket too.

High Amounts in Savings

Coming back to the urge to spend, this is where the trouble of wanting to put all the money into play. When seeing a ton of money set aside for a rainy day and saving for taxes it gets a little exciting to be able to use it for something else thinking that Murphy’s Law will not arise. This is fighting that urge and it’s harder than a person thinks. Think about the time you were 10 years old, and you were told not to eat a cookie, and every time you walked by the kitchen the cookie jar was calling your name to come eat a cookie. That’s exactly the same urge you get when the money is sitting in the account and you take a peek at it while there is a great investment offered to you, a new boat wanted, or a second house wanted.

The savings is there for a reason and the will power decreases over time, and it’s up to the person to hold strong. A great example of this will power is having a great budget, not going over that budget and consistently obeying that budget to get to peace of mind in life. Keep the will power high and your savings accounts will stay intact and high.

Conclusion

There are no wrong ways to build a savings account for taxes and emergency funds, there are guidelines that fit each person differently. The first rule is to just have a savings account, because a significantly high amount of people do not even have a savings account built up. It is awareness of what needs to be done, and how it needs to be done by navigating through tailored financials for you as the individual and not scaling based on someone else’s financials. Make sure to save the money, keep the money in your account for those two things and only for those two things without wavering.