Expect the unexpected. That’s exactly what you’re doing when you create an emergency fund.
Having money set aside for those unplanned twists and turns in life is something that everyone should consider. An emergency fund should be considered as important as creating a child’s college fund or setting up an account to save for a home’s down payment.
There are numerous reasons for having an emergency fund:
• It can be a backup source to pay for unplanned appliance and home repairs. If your roof springs a leak, or your washer machine breaks down mid-cycle, you won’t be left in the lurch if you have an emergency fund you can pull money from.
• It can help prevent you from going into debt in the event of a medical emergency. Unforeseen medical expenses can add up quickly, especially when surgery, hospitalization, or ambulance rides come into play.
• It can provide stability and resources in the wake of a job loss. Having money stashed away can take the pressure off in these types of situations, and can allow you to take the time you need to find a new job.
Whatever the situation, knowing you have the funds to deal with life’s setbacks not only brings peace of mind, but also lessens the strain on your finances. Many people ask why they need an emergency fund when they have credit cards. But when you really think things through, credit cards are just sources of borrowed money. You’ll still need to pay back whatever you borrow, plus any interest that has accrued. And that interest could be sizeable, perhaps as much as 20-30 percent depending on the credit card. In the end, it just makes more sense to tap into your own saved-up money, with no “interest strings” attached. An emergency fund can help prevent you from going into debt, and can even help prevent drastic consequences like having your car repossessed or your home foreclosed upon.
So how exactly do you go about creating an emergency fund? For starters, financial experts recommend establishing a separate bank account for your emergency savings. Doing so can help prevent you from dipping into the account for other, non-emergency needs. It’s generally suggested that you stash anywhere from three months to a year’s worth of regular income in the account so you’re ready when a crisis arises.
If you’re just starting out with creating an emergency fund, amassing that much money may seem overwhelming or entirely unachievable. However, the important thing is to start putting some money away as soon as you can, and to keep stashing it away on a regular basis. As you continue contributing money to your emergency fund, you’ll feel encouraged as you start to see your savings grow. Treat your emergency fund contributions as you would a car payment or a rent obligation – make them non-negotiable. By factoring your monthly emergency savings into your overall household budget, you’ll have an easier time sticking to your plan, and achieving your savings goals.
One easy way to automate your emergency savings contributions is to designate a reasonable amount of money from each paycheck (perhaps 3-5 percent of your weekly pay) to be directly deposited into your emergency savings account. Whoever handles the payroll at your job can most likely help you set that up. Let’s face it, if you don’t see the money on a weekly basis because it’s going directly into savings, chances are you’re less likely to miss it. You could also get in the habit of putting any bonuses or cash gifts you receive into the emergency account to help reach your savings goals faster.
No matter how much you stash away each month, your emergency savings account is going to keep growing as long as you’re contributing something on a regular basis. You’ll thank yourself later when disaster strikes, and you have the money to handle it!