Unexpected expenses are, by definition, not in your budget or plan. A surprise medical bill, a major car or home repair, or a job loss can all be financially devastating if you aren’t prepared. While you can’t plan an emergency, having an emergency fund is something you can do to help with the financial stress of it all.
Risk of Not Having an Emergency Fund
Without an emergency fund, you risk financial set backs. You may have to take on crushing credit card debt with no real strategy for repayment. You may find yourself with a pile of unpaid medical bills. And job loss while living paycheck to paycheck means that losing your home is a very real, and very scary possibility. Living without an emergency fund can be an enormous source of stress, yet nearly one-third of adults don’t have emergency savings.
Emergency Fund Goals
The ultimate goal for an emergency fund is 3 to 6 months of expenses. To find out what that means for you, you need to start with a budget, so you know what all your monthly expenses are and where your money is going. Your monthly budget will include savings, entertainment, clothing, gifts, and anything else you spend money on. When it comes to your emergency fund, the first step is to make sure you critical expenses are covered – mortgage or rent, utilities, food, and other monthly bills. Once you’re established, your emergency savings can grow to include your full monthly budget, but the focus should be on emergency expenses – not dining out.
At first, the number may seem overwhelming, so it’s good to start with small goals. An emergency savings of $1000 is a good goal to start with. Once you reach that goal, set your next steps month by month.
How to Get Started Building an Emergency Fund
First, look at the monthly budget you calculated and see where you can earmark for savings. This may mean trimming your spending so you can put money into savings. The easiest way to do this is automatic transfers into a savings account. For most people, if the money is in their regular bank account, it’s usable, so moving it into a savings account removes the temptation. "As you get used to saving, you may be able to allocate more monthly. As your income grows, the difference can also go to funding your emergency savings," suggests Jeff Mohlman, debt elimination strategist.
To help build your emergency fund at the beginning, simply allocating money from your monthly budget may not be enough. Looking for other sources of income, such as a part time job, a side hustle, or any additional sources is a smart move. Tax returns, bonuses, and gifts all fall into this category and are a great way to build your savings quickly.
How to Manage Your Emergency Fund
The most critical step is to get your fund to the ultimate goal of 3 to 6 months of expenses. Once you reach that milestone, it makes sense to put a portion of that into an account that will earn you more interest. You may want to keep only one month’s worth of savings immediately accessible, and the rest in a short term CD, money market account, or high yield savings account (online banks are good spots to find these accounts).
Finally, you want to keep tabs on your account. If you have a need for the money, your first savings goal after recovery should be replacing what you used. You also need to keep tabs on your monthly expenses – as they go up, your emergency savings needs to go up as well.
We know that it’s not just about knowing you need an emergency savings fund, it’s finding ways to set money aside, and that can be difficult. We can help. Starting the process, however slow, can make you feel like you have control over your finances and give you some much needed peace of mind in the future. Contact Safe Money Partners today for more information about how easy it can be to find room in your budget to save.