Anyone who has had large unforeseen expenses can either talk of how happy they were that they secured emergency funds or how difficult it proved to cover the expenditures. Just like it is with most finance-related issues, it is important to pre-plan in order to weather the storms you are sure to face at some point in life. No matter how financially prepared you are right now, life has a unique way of throwing unexpected curve balls. This is why most financial experts suggest tucking away some money in a savings account for about six months. Understand that all it takes is something as simple as a job loss for you to get from financially tight to destitute. Consider the following reasons to begin building an emergency fund.
This has been listed as the top reason everyone needs an emergency fund. When you are no longer in a position to receive regular pay, cash stashed away can help cover various expenses. Although the rule of thumb is to cover about six months’ worth of expenses, the average length of unemployment today lasts about 40 weeks, which means you might want to build a bigger reserve.
Some medical conditions can be financially straining, especially if you have no health insurance. Even with coverage and a major operation is involved, for instance, you have to fork out some cash to cover the policy’s deductible. You may also not have planned for fatalities, but if a loved one passes away suddenly, money will be needed. For instance, you may have to travel to the venue or cover bereavement-related expenses, and in such a case, emergency funds can keep the charges off your credit card.
Emergency Car and Home Repairs
Many car and homeowners rush to use their credit cards whenever emergency repairs are needed. Some faults such as a leaky roof, a broken water heater or a cooling system cannot wait. On the other hand, a breakdown can compromise your ability to get to work or even stay safe, which means your car has to be fixed or replaced immediately. Also, your insurance policy may not cover the repairs, leaving you responsible for them. It may be that you carry high deductibles on your insurance policy, meaning that even if you have a cover, you still need to pay for the necessary repairs.
How to get started
- Define your expenses: The first thing you need to do is to go over your car payments, mortgage, insurance, utilities, credit card and other monthly bills. Then write down your total monthly expenses and multiply the number by six months. This is the amount you should set as your emergency fund goal. However, if you feel the need to save for more than six months, multiply that number by the period you anticipate.
- Make cuts: After setting your monthly expenses, determine where you can make cuts. Begin by setting aside lose money in a jar each night. Rather than going to eat out frequently, have your meal at home.
- Get automatic deductions: Does your place of work offer automatic deduction? If it does, ensure a particular amount is deposited into your savings account every payday.
Saving your Emergency Funds
If you are yet to set up an emergency fund, the key is to start small. Understand that it takes some time to accumulate one month’s worth of expenses. However, setting your immediate goals gives you a better chance of reaching them. It is advisable to keep emergency funds in a credit union or a bank account. Having your money in a savings account makes it less likely for you to spend it on everyday non-emergency expenses.
By starting off with extra money left after your daily expenses, you can keep it away and allow it to accumulate. If you get a tax refund, use some portion to increase your savings and deposit money saved by cutting back on unnecessary expenditure. The other way of accumulating your emergency reserves is by asking your credit union or your bank to transfer your checking funds to your savings automatically every month.
If you are feeling confident, there is also the opportunity to make use of your current savings by investing in stocks and Forex, using such platforms CMC Markets if you have done your research well, there is a chance to increase your savings. By having your eggs in a few baskets, you can cover all bases for a successful approach.
It may seem pointless to live below your means right now, but you will be thankful that you did when rainy days arrive and your financial well-being is squeezed.