As a child, Michael Phelps struggled in the classroom due to Attention Deficit/Hyperactivity Disorder (ADHD). He had a lot of energy and was easily distracted. Frustrated by Michael’s impulsive behavior, one teacher told him that he would never accomplish anything of significance.
Debbie Phelps, Michael’s mother, had a different perspective on Michael’s capabilities. She worked with Michael on managing his impulses, and encouraged him to develop his strengths. Michael honed his capabilities over time, especially as a swimmer, and eventually became the most decorated Olympian of all time with 28 medals (23 of which are gold).
Michael Phelps’ story is particularly meaningful to me because I am the proud father of a son with ADHD. One of my favorite perspectives on managing ADHD comes from Dr. Ed Hallowell, a board-certified child and adult psychiatrist and best-selling author: “People with ADHD have Ferraris for brains; strengthen the brakes, and you’ve got a champion.”
Remember to Strengthen the Brakes
Can you see the value in this perspective? It has broad utility, too, and can be applied to multiple scenarios, including how we think about – and manage – our money.
The concept of strengthening the brakes came to mind as I met with an individual named Michelle at a pro-bono planning event. She said, “I’d like to buy a home in five years, but I’m concerned about my monthly cash flow. What should I think about to help me stay on track with my goal?”
After Michelle shared a bit more of her story, we both realized that establishing an emergency fund would help strengthen the brakes of her financial plan. This way, when an unexpected expense occurred, she would be able to use the money in her emergency fund to help pay for it without having to use a credit card or dip into her retirement account.
Michelle’s not alone in having a need for an emergency fund. Many Americans are not prepared for an unexpected $1,000 expense. Twenty-one percent of Americans say they have no emergency savings, while 27% of Americans say they have some emergency savings but less than three months’ worth, according to a 2020 Bankrate.com survey.
So, what are some practical strategies to establish an emergency fund and to stay on track with your financial goals? Here are three strategies to consider:
- First, know your flow. Take inventory of the money that goes in – and out – of your bank account each month. If you have more money going out than you have coming in each month, what are three expenses that you can cut back on or eliminate without hitting the panic button?
- Second, once you’ve identified some extra cash flow, use the power of automation to help you keep it. Set up automatic, monthly deposits to a bank or credit union savings account or money-market fund. If you struggle with getting started, here’s a mental trick you can use: Ask the bank or credit union to start the automatic deposit on a future date, such as your birthday or on your work anniversary date.
- Finally, set a target of saving at least three to six months’ worth of fixed expenses in your bank or credit union account.
If you would like to learn more about how an emergency fund can help you or other ways to strengthen the brakes of your financial plan, reach out to a local CFP® professional in your area today.