An emergency fund is like a back-up plan, in case you get short of funds or need funds urgently. Such events are costly and unexpected, and even stressful for some.
Following are the top events that can be called emergencies:
- Loss of Job
- Dental or Medical Emergency
- Troubles with Car
- Travel expenses that are unexpected
- Unplanned home repairs
Why is there a need of Emergency Fund?
Having extra cash in your saving account can eventually save you from asking people for money. An emergency fund will offer you a financial buffer that will help you avoid high-interest loans and or depend on credit cards, at the time of need. It is all the more significant if you already have these obligations.
What amount to save for emergency purpose?
You need to start small, such as saving $1000 in the beginning, and then increasing the amount in the coming months to save for expenses.
You should make an estimate and plan your monthly expenses: such as utilities, personal expenses, debt, transportation, housing, health care, food and insurance. Your saving objectives will eventually rely on your expenses and income, however, a normal rule of thumb is to make enough saving to be able to cover for 3 months of expenses.
In case when you’ve been working on a job that has been steady for few year, or are a member of two-income household, then an emergency fund for 3 months will be fine. But in case when you’re self-employed, or are a one-income household, or earn straight commission, in such situations having an emergency fund for 6 months would be a better option. It will be better because in case of job loss, it would be not possible for you to pay your bills.
Furthermore, in cases when a member of your house is suffering from a chronic medical condition that requires you to visit the hospital frequently, you need to go for a 6-month fund. Even if you are able to save some money every month, you should still be prepared for any emergencies that may come in your way.
Building an Emergency Fund
1. Set your goals to save every month. If you set goals for every month, you’ll have the habit to save and this task would then be less tough as time passes. One method is, directly transferring some amount in your saving account when you get paid.
2. Keeping the change. There are situations when you pay $20 for something and you get a change of $5 or $1, save these in some saving jar at your home. Make this a habit, and with time when the jar fills up, you can move the amount to your saving account. You can utilize mobile saving accounts as well, in case you don’t carry cash with you on a regular basis.
3. Clean your checking account. For example, if there is some cash remaining in your account by the end of the month, you can shift it into your saving account.
4. In situations where you’re unable to save money by the end of the month, cut expenses. Check which one of your expenses you can cut, in order to have some money to build your emergency fund. Some ways you can save your money is through: spending less money by reducing your spending on eating out, carpooling, avoiding small purchases that occur on a regular basis and saving leftovers.
5. Saving refund from taxes. This is an opportunity you’ll get once a year, only if you’re expecting a refund. Saving this refund can be a great way to increase emergency funds. When filing taxes, you can directly have your refund transferred to your emergency fund. Another option is adjusting your W-4 tax form in order to have less cash withheld. Then the extra cash can be directed to your emergency fund.
6. Adjust and Assess Contributions. You need to follow up and check the amount you’re able to save every month, and if required, make adjustments. These savings would be important especially when you’ll be going through some major events in your life such as moving to a new city or marriage.
7. Selling some stuff. You need to check your stuff, search up your garage and closet and see if there is anything you could get rid of. Even if it’s a small contribution, every saving helps. It will come to you as a surprise, how little savings can add up to a huge amount.
8. Work. Some of the work you could do include: baby-sitting, a side business, starting a part-time job, tutoring or anything that helps to earn a little extra cash.
Where to put your emergency fund?
Keeping your emergency fund at a location that is accessible, but not so accessible that you’d want to take the cash out when tempted, is an important decision.
Keeping your emergency fund at a location such as online banks is a good decision as you cannot just visit a bank and withdraw cash. You can keep your emergency funds on various locations such as money market account, short-term CDs and online saving account. Higher yields are also offered in online banks as compared to brick-and-mortar banks.
You need to determine how frequently will you be needing these emergency fund and in such cases how will you withdraw or transfer these funds to use them. A money market account is a good option since you might have to utilize the saving account as a transactional account, taking the assumption that he APY is competitive.
However, if you’re keeping your emergency funds in a saving account, that’s fine as well since you might want these funds deposited in a transaction account.
Start from now!
It’s always better to start with something, rather than waiting and doing nothing.
Even if you thing you won’t be able to save enough money, there is no need to worry.You can start off by saving little amount on a regular basis, by doing this, you will eventually be able to save a big amount.
At least you’ll be saving something.