What is your first thought when you read the words “emergency fund?”
Do you think about that last-minute flight you bought? Maybe the unexpected damages of powerful Mother Nature comes to mind. Regardless of your definition, having an emergency fund is vital when it comes to dealing with the unexpected.
If you don’t have an emergency fund, it’s never too late to start! Here are some very important tips you need to know about Emergency funds:
What is an “Emergency”?
Contrary to popular belief, an emergency fund is not a stockpile of cash for you to dip into when you find a good deal on last-minute flights to Fiji. It’s not an account for you to use when you’re shopping and find that leather jacket you’ve been dreaming of. An emergency fund isn’t even a resource for you to use when your buddy offers to sell you his beautiful motorcycle for “cheaper than market price.”
Why Emergency Funds are Important
Consider your emergency fund a further form of insurance: though it exists, it doesn’t (and shouldn’t) come in handy until absolutely necessary. Everyone has different emergencies, but here are some common examples:
1) You Lost Your Job
Though the economy is on the rise, thousands of people still lose their jobs each day. Without proper funds in place, the demanding expenses of everyday life – rent, mortgage, bills, groceries, etc. – can quickly send you spiraling into debt.
2) Car Troubles
Considering your car is your main mode of transportation, being without it can cause a snowball effect on your life: getting to work is difficult, caring for your family is a challenge, and so on. Therefore, getting your car replaced or repaired immediately is vital. Thanks to your emergency fund, you will be prepared.
3) Medical Expenses
Safety and health is the most important reason to having an emergency fund. It is crucial for you and your family to always be prepared for a medical emergency.
4) Home Emergencies
So that tiny leak in your ceiling is now a full-blown waterfall. Maybe your basement is now doubling as the family swimming pool. Yes, homeowners insurance might help, but it’s nice to have back up replacement/recovery funds just in case.
Everyone has different emergencies. Whether it’s a broken car or a house leak, it is always important to be prepared.
How to Make an Emergency Fund
Now that you know what an emergency fund is, how do you start building one? Don’t worry, we are here to help. By following these 5 easy steps, you can quickly and comfortably build a solid emergency fund.
1) Determine Your Amount
Before you start stashing cash away, make a financial goal for your fund. Though this ultimately depends on your income and living expenses, the general rule is to save six to seven months’ worth of expenses. Start with a small goal and build from there. Remember to always keep adding to your emergency fund. When you hit your goal, start a new goal.
2) Find a Home for Your Funds
Your emergency fund should be accessible enough to quickly utilize when needed but not so easy that you are tempted to use it on other expenses.
3) Consider it a Monthly Bill
Every time you sit down to pay your bills, add your emergency fund to the pile. By forcing yourself to save a certain amount every month (like paying a bill) you can quickly and steadily build your fund.
4) Only Use it When Absolutely Necessary
As we discussed above, your emergency fund should only be accessed if and when you experience an emergency situation.
5) Save Slow and Steady
An emergency fund doesn’t need to be six-figures. Start chipping away and eventually you will build up a solid and reliable cash stock. Instead of blowing your tax refunds or year-end bonuses, consider adding them to your emergency fund, you’ll see your fund grow at a rapid pace.
None of us can fully predict the way that life will go, so a fund dedicated to having money in place to help out whenever necessary is a very good idea. Good luck building your emergency funds! Thanks for reading.
