Secure Your Future: How to Build an Emergency Fund
In trying times we need to be prepared for any type of emergency whether it be a loss of job, medical emergency, natural disaster or any unforeseen event. One of the best ways to be prepared is to have an emergency fund set aside. Yet, when you are already living paycheck to paycheck how can you possibly save enough for an emergency? The answer is to simply just start now. You can take baby steps that lead toward a time defined goal. This creates a way, a means, and an end period for you to build up your emergency fund. First, let’s start out with some basics.
Why Do I Need An Emergency Fund?
When emergencies arise, many people rely on credit cards but the amount of interest you pay over time can make credit cards expensive. If you are struggling to pay your bills or find yourself not able to cover unexpected expenses, then you may benefit from an emergency fund.
This fund can help you stop adding to your debt every time there is an unexpected expense by adding to your credit card bill or forcing you to use a payday loan. An unplanned expense can set you back financially but not if you have the cushion of an emergency fund that is made up of at least three to six months of your living expenses. Start by looking at your budget and eliminate unnecessary expenses and always transfer money first to your savings account when you get your paycheck.
How Do You Budget for An Emergency Fund?
As stated above, you should aim to save between three and six months worth of living expenses in an emergency fund but how do you start? Begin by finding space in your budget to build an emergency fund by reducing monthly spending and cutting costs where you can. Check out a previous blog posts that gives some great tips and resources on basics of beginning a budget.
How Can I Save $1,000?
If you want to save $1,000, then you need to define a timeline for your goal. Start by reviewing your monthly expenses for the last few months. This will help you determine if you have any unnecessary spending habits and review your bank statements. Do you have unnecessary bills such as a cable bill, monthly streaming services or unused gym memberships? Do you eat out often, purchase new clothes monthly, or do daily coffee shop runs? If the answer is yes to either or both questions then you can start saving by making small adjustments to your monthly spending habits. This may not be easy so you need a dedicated plan and stick with it.
After analyzing your spending for the last couple of months, create a monthly budget that eliminates or minimize unnecessary expenditures.
The second step is to reduce your monthly bills. As you are doing your budget, look for any fees for unused services. Confirm that each automatic draft is actually for a service that you use.
The third step is to open a separate savings account. This savings account should not be used for day-to-day expenses. It will only be used for an emergency expense. Transfer money to your savings account from each paycheck you receive. This money should go to your emergency fund. Better yet, start an automatic draft so you won’t even miss the money because you never see it.
Let’s review those steps:
- Review bank statements for unnecessary bills/spending
- Create a budget
- Reduce monthly bills and spending
- Create a separate savings account that you DO NOT touch unless an emergency
Should I Invest My Emergency Fund?
When deciding to invest your emergency fund, consider investments where you instantly access your money in case you have an unexpected expense. Your monies should have limited market risk, be an interest-bearing account and be readily accessible. Look into money market accounts, Certificate of Deposits (CD’s) and high-yield bank accounts.
Money market accounts are like your traditional savings account. You have immediate access to your funds but make sure you understand the fees associated with your account.
A certificate of deposit is a type of a “saving” account that can be opened at most banks and credit unions. The major difference between a regular savings account and a certificate of deposit is the ability to earn a higher interest rate. To achieve the interest rate specified, you have to leave your money untouched until the specified maturity date. A certificate of deposit still offers you the flexibility to access emergency funds when needed but you can be subject to a penalty for accessing your funds prior to the maturity date.
High-yield savings accounts are a type of deposit account offered by most financial institutions. They are offered by local banks, credit unions and online institutions. High yield savings accounts typically pay a higher interest rate than traditional savings accounts. Research the interest rate, minimum deposit requirement, monthly fees, withdrawal options and minimum balance requirement before opening a high-yield savings account.
What Types Of Emergencies Need To Have Cash On Hand?
Unexpected expenses such as a medical emergency, unemployment, unexpected car repair expense, or natural disasters are all times when you need to have cash on hand. You should also consider having emergency money if you have only one source of income or you are self-employed. This money will come in handy when business is slow. If you own a home, an unexpected plumbing or air conditioning repair is not out of the question and your emergency fund can help you with those costs. You should also consider putting money aside if you have medical issues as insurance does not always cover all associated costs and you may require additional time off from work that will not be compensated.
Are Emergency Funds A Bad Idea? Should I Invest Instead?
No, having money for unforeseen expenses is NEVER a bad idea. We all can experience an unexpected event that can drain our budget and this money helps out in those times. Figure out space in your budget, as described earlier, to allocate money towards investing if that is something you are interested in. Take out all unnecessary expenses from your budget and focus on earning additional income if investing is important to you.
There are a myriad of options available such as working for a delivery service, doing ride-share, or starting your own business. You can also consider selling unwanted or underutilized goods such as books, clothing, unwanted appliances/kitchenware etc. to fund some of your investing. You can sell those items at a garage sale, a consignment shop or on websites devoted to selling such as Ebay and Offerup. The possibilities are endless and an additional source of revenue can allow you put aside cash in case of an emergency and invest at the same time. Stay focused and diligent in saving so unexpected expenses won’t set you back financially.
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