It’s not a matter of if, but when something will happen. Life and unexpected emergencies happen to everyone. It’s a part of life. If 2020 taught us anything about our financial lives, it’s essential to have an emergency fund. From losing a job, making an unexpected doctor’s visit, replacing a dishwasher, to paying funeral expenses, these situations could set you back financially and cause much stress if you’re unprepared to handle what life throws your way.
Are you prepared financially in case of an emergency? According to a recent Bankrate survey, only 39% percent of Americans have at least $1,000 in savings to cover an unexpected expense, and 21% say they have no savings to cover an emergency. Having an emergency fund could give you peace of mind and help cover costs when the unexpected happens. There’s no better time than now to start building your emergency fund.
Let’s take a look at the importance of an emergency fund, tips to build one, and where you should keep your money.
An emergency fund is cash set aside to cover unexpected expenses or emergencies that are not part of your budget. One of the most significant benefits of having an emergency fund is the peace of mind it could give you. It takes a load off your shoulders, knowing that you can handle an unexpected expense when it occurs. Another benefit to having an emergency fund is preventing you from going into debt or deeper in debt. It could prevent you from using your credit card or getting a loan to cover the expenses.
Most experts recommend saving at least three to six months of expenses. If you have no savings, this may seem overwhelming and intimidating. The key to building your emergency fund is to start with a smaller number to make your goal feel manageable and obtainable. Let’s say you set a goal to save $500. Once you accomplish this goal, continue to set smaller, manageable goals until you work your way towards saving 3-6 months of expenses.
When you’re determining how much to save for an emergency fund, you should only include your essential expenses such as housing, transportation, food, insurance, debt, and personal expenses. The nonessential expenses you don’t have to include are vacations, dining out, needless shopping, or entertainment.
There are many ways to build an emergency fund. The key is finding a plan that works best for you, keeps you motivated, and helps you stay consistent with building your “rainy day” fund. Here are a few ways to help you start your emergency fund.
The first step to building your emergency fund is to create a budget. It gives you a clear picture of your income and how much you’re spending each month. It could help you manage your money better and reduce your spending. If you’re creating a budget for the first time, it may surprise you how much money you spend without realizing it. The bag of chips, bottled water, or pack of gum you purchase while waiting at checkout or the daily trips to your favorite coffee shop may seem small, but the costs quickly add up. Most people spend more money than they realize until they track their expenses and see it in their budget.
After creating a budget, you’re able to see where you may be overspending. Do you really need a monthly subscription to Netflix, discovery+, and Disney+? Do you have to eat out every day? Probably not. Carefully review your budget to see where you can eliminate unnecessary expenses. For example, cancel gym memberships and subscriptions, use coupons, cut the cable, evaluate your insurance and phone plan, and cut your hair at home.
Review your budget to determine how much you can comfortably save each month to build your emergency fund. It may be challenging to get in the habit of saving, especially if you feel you don’t have the extra money to apply to savings. However, consistency is key. You’ll be pleasantly surprised at how quickly your savings can grow if you’re consistent about saving.
Out of sight, out of mind. Having a savings account specifically for an emergency fund and automatically depositing funds into the account is a sure way to grow your savings. If you have the option to set up a direct deposit, this is the way to go. Most employers offer a direct deposit with the option to split your paycheck between multiple checking and savings accounts.
There may be a time when you receive unexpected cash from a rebate check, birthday cash, or tax refund. Have a plan in place before you receive your extra cash, so you’re less likely to spend the money when it comes your way. Since this money isn’t part of your budget, you won’t miss it, and saving this extra money will put you closer to your savings goal.
Consider ways to increase your income. Do you have a hobby you can turn into a side hustle? Consider a dog walking business if you love dogs and taking long walks. Do you have stuff in your home you could sell? Have a yard sale or sell items online to make money from things you don’t want or need. Also, if you have the extra time and energy consider, a second job. Other ideas to increase your income – Uber/Lyft driver, food delivery, ask for a raise, and lawn mowing/pressure washing.
Emergency savings should be held in a separate savings account that’s safe, quick, and easily accessible in case you need it. Stashing your money in a high-yielding savings account grows your deposits from the interest earned on the account. When determining where to keep your emergency fund, consider a regular savings account, money market account, or certificate of deposit (CDs).
Yes, stuff happens. When it does, are you prepared to handle it without creating more stress and debt in your life? Building an emergency fund can provide a financial cushion to protect you and your family from unexpected expenses that are bound to happen. If you’re consistent with saving for emergencies, you will be better prepared to handle the unexpected when it comes your way.