Emergency Fund 101
When it comes to money, disasters seem to strike when you least expect them. If you are not properly prepared, things like unexpected car repairs or emergency medical bills can send your budget into complete disarray. Building an emergency fund can help protect you from the unexpected. To help you get started, here is everything you need to know about an emergency fund.
What is an emergency fund?
Imagine that your car breaks down heading back home from a road trip. You tow the car to a dealership, only to find that the repairs would cost more than the car is worth. Since you need transportation to get to work every day, you now have to buy another car. While you can go here to learn how companies like AutoLoanSolutions specialize in helping credit-challenged people get into their dream cars, you may still need to come up with a down payment. This is where an emergency fund comes in handy.
An emergency fund is a special pot of money that you set aside to cover unexpected bills. Unexpected expenses may include things like losing a job or unexpected car repairs. In the event that you need to pay an unexpected medical bill, an emergency fund can keep you from having to take drastic measures
Why should everyone have an emergency fund?
As the name implies, an emergency fund is a financial buffer that can keep you afloat during an emergency. When unexpected expenses arise, you can dip into your emergency fund rather than having to rely on credit cards or high-interest personal loans. This is especially important if you are already in debt and trying to work your way out of it. An emergency fund can keep you from going even further into debt.
How much money should be in an emergency fund?
The amount of money needed in an emergency fund will vary from person to person. As a general rule of thumb, your emergency fund should hold three to six months of expenses. In the event that you are laid off from your job, this money could be used to pay your basic bills while you search for a new one.
The thought of saving three to six months of income can seem daunting, especially if you are already barely scraping by. Just remember that emergency funds are not built overnight. The key is to start small and grow your nest egg over a period of time. Saving just $500 is enough to get you out of many financial binds.
Where should an emergency fund be kept?
Your emergency fund should be kept in a place that is accessible, but still separate from your everyday spending accounts. Putting your money into a high-yield savings account allows it to earn interest while also being easily accessible.
Since you never know when an emergency will strike, having quick access to your cash through withdrawal or wire transfer is essential.
Building an Emergency Fund
When it comes to building an emergency fund, slow and steady wins the race. Here are a few tips to help you build yours:
1. Create a monthly savings goal. Having a monthly savings goal will train you to make saving part of your normal routine. This can help make the task of saving seem less intimidating. One way to go about this is to set up an allotment to a certain amount of funds automatically go to your savings account each pay period.
2. Cut your expenses. This is a tried and true savings method. Start by looking at your monthly spending to identify areas of waste. Things like skipping your daily coffee or carpooling to work can quickly add up.
3. Get a part-time job. If you have the time to do so, getting a second job can be a great way to build your emergency fund.
4. Bank your tax refund. Each year, many people eagerly await their tax refund so they can get caught up on bills or make large purchases. If you anticipate getting a refund during the upcoming year, consider adding all or part of it to your emergency fund. If you do not believe you have the discipline to transfer the money to your savings, consider having it deposited directly into your savings account.
5. Review your savings regularly. As you begin saving for your emergency fund, remember to review your savings every few months to identify if there are ways that you could be saving more.
Emergency Funds Are for True Emergencies
While it may be tempting to dip into your emergency fund at various times throughout the year, keep in mind that your emergency fund is for emergencies only. An emergency should be something that directly affects your health or your livelihood. Your emergency fund should not be used for things like birthdays or pick me ups.
An emergency fund is something that everyone needs. Having these fund set aside can mean the difference between surviving a financial blow or going deep into debt.
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