Although we plan for what we can, there are times when unforeseen expenses can threaten to destroy our financial security. You’re paying your bills, you have some expendable income, but unexpected circumstances can quickly turn into financial catastrophes. Medical emergencies, major home repairs, or job loss can cause massive stress if you don’t have a plan.
What is an Emergency Savings Fund?
An emergency savings fund is money that you set aside and earmark for unforeseen expenses. It should be separate from any other savings accounts and designated only for emergencies. This fund should be used for things like medical bills, home repairs, or monthly expenses in case of job loss. It’s best to use your emergency fund only for true emergencies that would threaten your financial future or assets.
How Much Will You Need to Save?
The amount will vary from household to household. Most experts recommend about three to six months of living expenses is a good place to be. Because every situation is different, every household will have to determine what the dollar amount is for their own family. The first step is to figure out your monthly cost of living. Over the next month or two write everything down that you spend. Determine which expenses are recurring and necessary. Take that amount and multiply by three-this amount will cover your necessary expenses for three months (for your first goal) and then by six (for your long-term goal).
Building Your Fund
When it comes to saving or paying down debt, different experts have differing opinions about where your priorities should fall. If you have no savings, any emergency will push you further into debt. However, if you only focus on saving, your debt will increase through interest. When you’re starting out, it’s probably best to save a small amount first ($1000 or so) and then focus on reducing debt. Once your debt is under control, look again at your monthly budget and try to figure out how much you can contribute to your emergency fund monthly while you work toward your savings goal.
Cutting expenses can help, and sometimes, getting another source of income can help you reach your goal quickly. "Once you’ve started your emergency savings fund, it’s important to keep it in a place where you can get to it if you need it but won’t be tempted to go to it when you don’t," advises debt elimination strategist, Jeff Mohlman. A separate savings account or money market account is a good place to start. Once your account is built, it may make more sense to keep one month’s worth of expenses easy to access and have the rest in a place where it can earn more interest.
Easy Ways to Save Money
Building an emergency fund, especially one with six months of expenses, can feel like a daunting task. There are some easy ways to save money that can help you. Tracking your monthly expenses and finding ways to cut can save you more than you think. Cut expenses, such as eating out, subscriptions or memberships you don’t need, or even just thinking about each purchase before pulling the trigger. These seemingly small steps can add up quickly. Most people don’t like tracking every dollar, but once you start, you’ll find that more dollars can find their way into your savings account. There is nothing wrong with paying yourself first-in fact, we should be paying ourselves first. Downloading money tracking and savings apps can make this much easier for you. In addition, setting up direct deposit for savings takes the money before you even see it in your account, removing the temptation to spend more than you should. Taking advantage of any excess cash (a raise, a bonus, a tax refund, or a gift) by earmarking it for your financial security is another smart idea.
When you have a smart savings goal – and building an emergency savings fund is definitely a smart goal – saving for it can be easier to prioritize. Let’s be honest-we can all be smarter with our money, and we can help you find ways to reach your financial goals faster. Let’s talk about how to make small adjustments to your current financial path to put you in a better position later. Contact Safe Money Partners today to learn more.