The most important thing to do in order to survive an emergency, particularly if it happens out of the blue, is to have an emergency fund (also known as an emergency savings fund or an emergency cushion).
This is a reserve of money you’ve set aside specifically to help you get through situations where income might be lost due to injury, illness, death in the family, unemployment, or other unexpected events that can wreak havoc on your finances.
A healthy emergency fund will help you maintain your lifestyle even when money is tight. Here are some tips on how to start building your emergency fund today!
What is an emergency fund?
An emergency fund is a little money that you put away that can be used for unexpected expenses or emergencies. An emergency fund can help you out in the event of an illness, accident, layoff, sudden car breakdown or an appliance malfunction, and other issues.
The idea is that if something happens, the savings are available to cover you.
Emergency funds are often made up of cash and they can include two different amounts of money—smaller amounts set aside in case of emergencies (like $500) and larger amounts set aside for the worst-case scenario (like $10,000).
That way, even if your circumstances change later on and you have less money coming in than you had hoped, you’ll still have some funds set aside for more serious issues down the line.
Financial experts recommend that you set aside three to six months’ worth of basic living expenses. This should cover anything from medical expenses to utilities to WiFi, and anything else that could make life tough. Aside from the basics, you should also include items like a leave of absence for a sick family member.
Why have an emergency fund?
People often underestimate the importance of having an emergency fund, because they don’t know what emergencies look like. Emergencies can come in many forms, such as unexpected medical bills, auto or home repair costs, flooding from a natural disaster, or job loss.
Depending on the urgency and severity of an emergency, it can be costly and sometimes impossible to get a loan or other form of credit if you need one urgently. This is why establishing an emergency fund – with at least $1,000 – is so important. It gives you security when life throws unexpected curveballs in your direction.
How can you save for emergencies?
There are plenty of ways that you can put money away for a rainy day. You just need to decide what works best for you. The way that I like to save is by using my employer-sponsored 401(k) account and putting in enough before the end of the year so that I get that year-end bonus when I file my taxes.
This is called paying yourself first. Another way would be starting a side hustle with some work as an independent contractor or freelancer, which will pay you in a few months.
Many people forget to transfer money from their checking account to their savings account or retirement account. However, setting up an automatic transfer can help you stick with the habit.
In addition to saving money each month, automated transfers can also help you stay on track with saving goals. In addition, you can start saving your spare change to build an emergency fund if you prefer not to use automatic transfers.
High-yield savings accounts offer higher interest rates than traditional savings accounts. Often, these accounts have signup bonuses that are great for padding your emergency fund.
Questions to ask yourself before you spend money
1 What is my goal?
2 What is the timeline?
3 Who will help me reach this goal?
4 Where can I set up an emergency fund?
5 What are the best accounts for my emergency fund?
6 How do I invest in stocks with a small amount of money?
7 What should I do if I want to save more than $1000?
8 How much should my emergency fund be worth when complete?
9 Shouldn’t all of my savings go into one account and then come out only when needed?
What should you do when emergencies arise?
Emergencies can come out of nowhere, and there is never a way to know when they will occur. To make sure you are prepared for them when they happen, having an emergency fund built up should be a priority.
Emergencies are unexpected costs that come about for reasons like car repairs, medical bills, natural disasters, or unemployment. When emergencies arise and you don’t have the cash necessary to cover them in full or in part, not only do you risk going into debt or losing your home but these misfortunes can also affect credit scores and overall quality of life.
What should you do? -The best solution is always to prepare ahead of time by setting aside money each month in order to build up an emergency fund with at least six months worth of income.
It’s important to take control and set goals so that you know how much money needs to go towards which expense; if you put away enough now, chances are good that those unexpected surprises won’t derail your financial plans.
If those preparations sound difficult or impossible, then some other options include refinancing high-interest debts (such as student loans) at lower rates and adding term life insurance policies.
Why saving habits matter more than just saving
Life is full of curveballs. Sometimes, you will be hit in the face with something completely out of the blue and it isn’t much you can do about it but play along and continue on as best you can.
It doesn’t matter how much money you have in savings, there is never a guarantee that we will get what we are planning for or what we need. Start saving now so that when one of those curveballs hits, you are ready.
Everyone has emergencies from time to time, and there’s no better way to handle them than with an emergency fund. The bigger the better, in my opinion. Keep in mind that this is for emergencies only, it doesn’t replace savings for retirement or buying a house.