One of the best ways to protect your finances from unforeseen events is to have an emergency fund. An emergency fund is a specific amount of money, preferably kept in a liquid and easily accessible savings account, that you can use if you face an unexpected expense or a situation that your regular income cannot cover. — Worldculturepost
The size of your emergency fund may vary depending on your needs, but it is a financial tool that almost everyone should have. Financial emergencies can include losing your job, having large medical bills, needing to pay for a vet visit, repairing your home or car, or facing something you never imagined.
In those cases, you could resort to using a credit card or a personal loan to bridge the gap, but that would mean taking on debt. Having an emergency fund ready can help you stay on a solid financial footing. Here are some steps to follow if you want to create your own emergency reserve of cash.
Calculate Your Monthly Expenses
Most financial advisers suggest that you should have between three to six months of living expenses saved in your emergency fund. The first thing you need to do is figure out how much of an emergency fund suits your situation. To do that, you need to add up your monthly expenses.
Make sure you include both fixed and variable expenses when estimating how much you need to save. Here are some examples of fixed and variable expenses that you should consider:
- Housing Expenses: rent or mortgage, utilities
- Insurance: life insurance, renter's insurance, homeowner's insurance
- Taxes: FICA and income taxes
- Debt Repayments: credit card debt, student loans, car loans
- Healthcare: health and dental insurance
- Childcare: if applicable, daycare or babysitter expenses
- Personal Living Expenses: groceries, personal items
- Transportation: gas, taxi, or public transportation
After you have calculated how much you spend in these categories every month, you can then decide how much you need in your emergency fund. If you have a spouse or a partner, make sure you include their costs as well so that you can get an accurate estimate of how much you need to save.
You may also want to add some extra money if you have children. Some experts advise adding another $1,000 per child, per month. For example, if you have determined that your ideal emergency fund is $18,000 ($3,000 in monthly expenses x six months) and you have one child, you would add another $6,000 to the total ($1,000 per child x six months).
How to Save for Emergencies
One of the smartest things you can do for your finances is to have an emergency fund. An emergency fund is a specific amount of money, ideally kept in a liquid and easily accessible savings account, that you can tap into if you encounter an unexpected expense or a situation that your regular income does not cover.
The amount of money you need in your emergency fund may vary depending on your circumstances, but it is a financial tool that almost everyone should have. Financial emergencies can range from losing your job, facing large medical bills, needing to pay for a vet visit, fixing your home or car, or dealing with something you never anticipated.
In those scenarios, you could rely on using a credit card or a personal loan to fill the gap, but that would mean taking on debt. Having an emergency fund ready can help you avoid that and maintain a solid financial position. Here are some tips on how to create your own emergency cushion of cash.
Set Your Emergency Fund Goals
If you have not started an emergency fund yet, begin by setting some goals for how much you want to save. Start with $1,000 as your first target, then work on saving up one month’s worth of expenses. It will take some time, but if you make your immediate goals small and achievable you will have a better chance of reaching them.
The simplest way to start saving is by opening a separate savings account at your bank or credit union. The next step is to make regular deposits into this account. Automation can make this easy. Whether it is weekly, bi-weekly, or monthly, set a schedule and follow it. Once you make saving automatic you will not even have to think about it.
If you find it hard to start saving begin with a small amount. Maybe you start with $10 a week at first. While this will not add up very quickly the important thing is to start putting something aside and make it a habit. After a few weeks, you will not even miss that $10 so you can increase it to $15 or $20 after a month or so. You will get used to that money not being there and can gradually raise it again.
Use Your Emergency Savings Only for Emergencies
You want your emergency fund to be readily available at any time. But, you do not want to be tempted to use that money unless you really have to. So, as you grow your emergency savings account, establish some rules on when and how you will use that money. For example, if your child breaks their arm and you have to pay the deductible for your insurance, that is an emergency. Finding a great deal on a pair of designer shoes, on the other hand, is not.
Also remember that you should keep your emergency savings in an account that offers a good interest rate. The higher your annual percentage yield, the faster your money can grow. By following these three tips, you will be well on your way to being ready for any situation that causes an unexpected financial loss.