An emergency fund is an amount of money you set aside in the event of an unexpected financial roadblock. And yes, you do need an emergency fund. For many people, saving money isn’t easy. A 2017 study by the Federal Reserve found that almost half of Americans do not have enough saved up to cover a $400 emergency expense. This has not changed since then.
Putting aside money now will be less painful than being in a stressful situation without the means to help yourself. In an ideal world, everyone would have 3 to 6 months of living expenses sitting in an emergency fund.
For many people, this may not be a feasible option. It might be easier to focus on starting with a $1,000 and work your way up to a higher balance. The point is to begin saving, no matter the amount. Even $1,000 can help avoid putting unexpected major payments on a credit card or being forced to borrow money.
How to Set Up Your Emergency Fund
There two different methods to build your emergency fund. For both methods, you should set up a separate account dedicated to putting aside money. “Out of sight, out of mind” is a good rule of thumb for emergency funds. As a side note, building an emergency fund is just as important as paying off outstanding debt. This way when something occurs you won’t have to rack up even more debt.
The best way to set up an emergency fund is to have a specific amount deducted from every paycheck. Small amounts such as $50 per paycheck will add up to $1,300 in one year, if you are paid bi-weekly.
Collect change and small bills
Another way to accumulate money is to have a jar in your home where you can put any extra change or small bills. Whenever the jar is relatively full, deposit the cash into your emergency fund bank account.
Common Uses for an Emergency Fund
Many expenses are somewhat predictable. You may have a budget for basic expenses such as food, rent or mortgage, and cell phone because they are generally the same every month. However, sometimes things happen that you can’t plan for in advance. These situations are why emergency funds are so essential. Here are just a few of the most common reasons to have an emergency fund.
Surprise Car Repair
It’s inevitable that you will wake up one morning and your car won’t start or you have a flat tire. You need your vehicle to get to work. Having to spend money on emergency car repairs isn’t great, but you’ll sleep easier knowing you are prepared to deal with it when the time comes.
Unexpected Home Repair
Perhaps you can’t sleep some night and hear the faucet in the kitchen start to drip. Or maybe your washing machine stops spinning and it needs to be repaired. Again, both of these types of expenses are unpredictable and unplanned. Knowing that your washing machine has been fixed several times and will eventually stop working is not an emergency. You should have already been planning (and saving) for a new one.
Sometimes things happen in our lives that are out of control. A trip to the emergency room even with a co-pay could put a dent in your budget.
Family Member’s Illness
Your Mom who lives several states away needs your help because she is ill. Your emergency fund can be used to purchase an airline ticket.
Be Sure it is an Emergency
Don’t spend it on anything that is a want vs a need. It is not intended for expenses that you ‘forgot’ about. Buying a gift for Mother’s Day or for your favorite uncle’s 90th birthday party are important expenses. These are not, however, emergencies.
Do you feel as though you can’t get a handle on how to properly manage your money? At The Alexandrite Group, we offer lessons on how to budget properly, stop overspending and avoid credit card debt. Learning to keep an emergency fund is just one of the things you’ll get in the habit of doing to live a financially stress-free life. Contact us today to discuss how our services can begin to help you.