When my friend bought his first home, little did he know that his homeowners insurance did not cover flooding. Unfortunately, a hurricane came through and caused damage to his floors, windows, and wiring. Since he had no emergency fund saved up, he had to take matters into his own hands and fix the wiring himself. He lived with boarded up windows and warped floors for several months before he could afford to make the necessary repairs.
In times of unexpected financial crises, such as hospital bills, job loss, or hefty speeding tickets, the last thing anyone wants to do is make a hasty financial decision that could have long-lasting effects. Thankfully, we can prepare ourselves for life’s unexpected twists and turns by establishing emergency funds. These funds are savings accounts specifically dedicated to covering major, unforeseen expenses. Having a well-maintained emergency fund ensures that you have enough money to cover essential expenses for a period of 3 months to 1 year.
Building up an emergency fund takes time and effort. It’s a good idea to start by saving $1,000 as a starting point. While this amount may not cover everything, it gives you a buffer to conduct research, seek support, and determine the best course of action.
Although we all know that the unexpected can happen, many people believe that it won’t happen to them. Shockingly, 56% of Americans say they can’t cover a $1,000 emergency, let alone a larger catastrophe. An emergency fund helps cover any unforeseen expenses or provides a safety net in case of sudden loss of income.
While most people think of medical bills and unexpected repairs as emergencies, financial emergencies can take many forms. This includes losing a job or clients, dealing with medical emergencies, requiring home or car maintenance, facing unexpected travel costs, or being responsible for funeral expenses. Being prepared for emergencies not only decreases the burden during difficult times, but also helps prevent falling into debt. It’s important to remember that emergencies can happen to anyone, but emergency funds are particularly crucial for business owners or those in the informal economy. Unexpected emergencies not only incur expenses, but also result in lost time and income. For self-employed individuals or business owners, every hour away from work means a loss of earnings. If an emergency prevents work, the financial consequences can be twofold.
Determining the amount of money needed in an emergency fund varies for each individual. Experts generally recommend saving 3-6 months’ worth of regular expenses for those with standard 9-5 jobs, and 5-12 months’ worth for business owners. Personal risk factors, such as pre-existing medical conditions, car ownership, economic stability, and lifestyle choices, also need to be taken into account when assessing the required emergency fund. Once determined, it’s important to find a suitable place to store the funds. The emergency fund should be accessible, but not too easily accessible to avoid temptation for non-emergency spending. Checking accounts are typically not recommended. Likewise, investments in stocks or real estate are not ideal for emergency funds. It’s advisable to find a high-yield savings account that offers a reasonable return on the savings.
Knowing how much to save and actually saving often differ. Tracking expenses and creating a budget is an effective way to determine where savings can be prioritized. A popular budgeting strategy is the 50/30/20 approach, where 50% of income goes towards everyday expenses, 30% towards discretionary spending, and 20% towards savings. This 20% can be divided between the emergency fund and other savings goals. The amount directed towards the emergency fund will depend on existing savings and the desired amount to be saved.
To ensure consistent progress towards the savings goal, automatic transfers are recommended. By setting up automatic transfers from the checking account to the emergency fund, the money goes directly to savings and reduces the temptation to skip contributions. Consistency is key, as even small amounts can make a difference in the long run.
If budget constraints make it challenging to prioritize savings, a closer look at personal expenses may be required. Expense tracking applications can help categorize expenses and identify areas where cutbacks can be made. Even if there’s not much left to save, setting aside as little as $1 a week can still contribute to the emergency fund. It may not seem significant, but over time, it can accumulate into a substantial amount, especially with the added interest from the high-yield savings account.
To stay motivated, it can be helpful to write down the emergencies that are feared the most. Visualizing the purpose behind saving makes it easier to stay committed. Inconsistent income and expenses can make saving more challenging. In such situations, it may be more practical to withdraw a fixed amount from savings each month rather than setting up automatic transfers. However, regular check-ins are still important to track progress and maintain motivation. It’s a good idea to allocate 30 minutes monthly to review one’s savings. Making the process enjoyable can help reduce stress, such as having a budget date at a favorite coffee shop or ice cream parlor.
For added accountability, consider finding a responsible partner to review savings together. This could be a friend, partner, or family member. Setting a date to meet and check savings progress makes it harder to neglect this crucial task. It is easy to let oneself down, but more difficult to disappoint a friend.
With consistent effort and dedication, the emergency fund may eventually grow beyond its initial purpose. However, it’s important to remember that the fund should only be used for real emergencies. Not all unexpected expenses are dire emergencies, and it’s crucial to maintain the integrity of the emergency fund. When drawing on the fund, one must carefully assess the situation before utilizing those savings.
Ultimately, building and maintaining an emergency fund is a vital aspect of financial preparedness. It provides a sense of security and acts as a safety net when the unexpected occurs. By taking the time to determine the necessary amount, finding a suitable savings option, and prioritizing savings in one’s budget, individuals can be better equipped to handle financial emergencies and avoid unnecessary debt.
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When my friend bought his first home, he had no idea that flooding was not covered by his homeowners insurance. A hurricane passed through and damaged your floor, windows, and wiring. With no emergency fund saved to cover the damage, he had to fix the wiring himself and lived with boarded up windows and warped floors for months before he could afford the repairs.
Whether you’re facing an unexpected hospital bill, a layoff, or a really expensive speeding ticket, when you’re in fight or flight mode, the last thing you want to do is make a financial decision that could affect you for years.
Fortunately, we can prepare ourselves for the twists and turns that life throws at us. Emergency funds, savings accounts you only use when you need to pay for big, unexpected expenses, can keep a bad situation from becoming impossible.
A well-maintained emergency fund ensures that you will have enough money to cover from 3 months to 1 year of essential expenses. Of course, you won’t get there overnight. You may want to start by saving $1,000. This may not cover everything, but it may give you plenty of time to do some research, call in backup, and figure out the best path forward.
We all know to expect the unexpected, but rarely believe something unexpected will happen to us. These days, 56% of Americans they say they can’t cover a $1,000 emergency, let alone something more catastrophic. An emergency fund helps you cover any unexpected expenses or keeps you afloat when you unexpectedly lose a stream of income.
While most people think of scary medical bills and unexpected repairs when someone says “emergency,” many things constitute “financial emergencies.” TO financial emergency it can be any of these (and many more):
- Losing a job or clients
- Finding medical emergencies
- Need home or car maintenance
- Find unexpected travel costs
- Be responsible for funeral expenses.
Being prepared for an emergency will not only allow you to have less to handle in a difficult time, but it can also keep you from going into debt. You could end up paying more for the expense and it could negatively affect your credit score as well as your ability to borrow money in the future.
While anyone can experience an emergency, emergency funds are particularly important if you own your own business or work in the informal economy. Unexpected emergencies not only cost money, they also cost time. If you are self-employed or a business owner, you may not have sick days or paid time off. Every hour you don’t work is an hour you don’t earn. If an emergency keeps you off work, you will pay a double penalty.
Similarly, if you’re responsible for running your own business, a few unexpected days off could mean angry customers and a major hit to your revenue stream. Avoiding these situations requires just a little planning and a little saving.
Now that you know why emergency funds are important, your next question might be: How much money do I need in it? Most experts recommend saving 3 to 6 months of regular expenses if you have a standard 9-5 job and 5-12 months for business owners. This number looks different for everyone, so you’ll need to spend some time budgeting.
In addition to calculating your monthly expenses, you may need to think about your level of risk. To assess personal risk, you can consider any of these things:
- Your pre-existing medical conditions or those of your family members.
- Whether or not you have a car
- The stability of the economy.
- Risk of your lifestyle.
If you have a business, You may also need to consider the risks and adaptability of your effort.
Once you know how much you want to save, you need to know where to put it. A good emergency fund should be accessible, but not so so accessible that you may be tempted to use it for non-emergencies, so checking accounts are probably no longer available.
A good emergency fund should also be reliable, which means stocks or real estate are probably not good ideas. Of course, you still want it to earn something of value, so stashing cash under your mattress isn’t ideal (although not unpopular). A high-yield savings account may be your best option.
Right now, most high-yield savings accounts offer between 4% and 5% APY. As the Federal Reserve raises interest rates, saving becomes even more attractive. If you are a business owner, you may want to consider opening two accounts, one for your personal life and one for your business.
Knowledge how much save and know as saving are two different things. Fortunately, if you know how much to save for your fund, you should know how much you’re spending. Once you know your spending, you can start to prioritize savings by turning your habits into a budget.
For you first time quoteSo a 50/30/20 budget might be a good starting point. 50/30/20 means you use 50% of your income for everyday expenses, 30% for “fun” and 20% for savings. Your 20% savings could be split between your emergency fund and any other savings goals. The amount you need to divert to your emergency fund will depend on how much you have already saved and how much you need to save.
Once you know how much you need to save each month, automatic transfers are an effective way to ensure you reach your goal. Sending the money directly to your savings without even seeing it in your checking account makes it much easier to contribute consistently and eliminates the temptation to skip your contribution that month. Once the money arrives in your checking account, it’s easy to buy one more drink at the bar, but if you don’t see it, you won’t be tempted.
If you feel like you don’t have enough room in your budget to prioritize savings, you can dig deeper into your personal budget with expense tracking. Applications that can automatically categorize your broad categories of expenses. Spend a lot in restaurants? Try to eliminate a meal or two each month. For business owners, you can try using some of these tools to deepen the budget of your company.
If you go through everything and can’t find a single category to delete, you can still set something aside for your emergency fund. It may sound silly, but putting just $1 a week into an emergency fund is better than nothing. You’ll have $52 after one year, and with 5% APY, you could have more than $1,000 after four years.
Once you’ve got everything set up, you may forget why you started saving. To stay motivated, it might help to write down some of the emergencies you fear most. Visualizing because you’re saving makes it a little easier to keep contributing.
Inconsistent income and expenses can make saving even more difficult. If you don’t know how much you’ll earn each week, or worse, if you don’t know how much you’ll spend, it’s hard to know how much you can save. In this situation, it may not make sense to withdraw money automatically, but to withdraw some savings each month.
Of course, withdrawing savings every month can make motivation even more difficult. To stay on track, set aside 30 minutes or less each month to see your progress. These regular check-ins not only give you a time and a place to worry about your savings, they also encourage you to keep saving by showing you concrete changes.
If looking at your finances stresses you out, and trust me, most of us do, make it fun. Give yourself a monthly budget date. Go to your favorite coffee shop or ice cream parlor to make the budget seem a little more rewarding.
If you’re still nervous, find a responsible partner. Make an appointment with a friend, partner or family member and review your savings together. You don’t need to talk about how much progress you’re making, but setting a date to meet and check your savings makes it harder to avoid the chore. It is easy to abandon yourself. It is much more difficult to abandon a friend.
If you keep up the progress for a few years, that emergency fund might start to look like a great vacation fund… But you should only draw on your emergency fund when necessary.
Not all financial emergencies are dire. Sometimes they are just unexpected expenses that become emergencies if you do not attend to them. If a snowstorm prevents you from getting home but you need to go to a job interview, you may need to tap into the emergency fund to find alternative transportation and avoid unemployment. Ask yourself, Can I afford this? If the answer is “no”, ask, Will I be okay if I don’t spend this money?
What constitutes an emergency may look different if you are fired. In this case, you’ll need to tap into your emergency fund to cover what seem like fairly regular expenses. Paying utilities, rent, and food all become emergencies when you have no income.
Accessing your account is not the end of the story. Unfortunately, emergencies are not a one-time occurrence, so when you use your emergency fund, you’ll need to replenish it. That could mean letting your automatic transfer continue to work its magic, or increasing your contributions once you’re out of the woods.
Even if you avoid drawing on your emergency fund, you should check your fund once every few years. As you get older, you become more prone to emergencies. Whether you’re thinking of increased medical bills, more mouths to feed, or new assets like homes and cars, your risks only increase with age.
We do not live in a stable world. People get sick or injured, cars are stolen, the economy takes a turn, and your department is laid off. None of us know what might come next. If you have an emergency fund, you can navigate these dangers without worrying about your statements or going into debt.
Whether you start by calculating your ideal emergency fund (based on your monthly expenses, job type, and overall risk level) or putting $1 a week into a high yield savings accountNow is the best time to start.
The charge How to save money for an emergency fund appeared first in Earring.
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