When it comes to your finances, you should always be prepared for the unexpected, and this is why you need an emergency fund. The best thing you can do for yourself is prepare for emergencies that require access to additional money. Having an emergency fund set aside is the ideal solution.
Financial emergencies can come in the form of a job loss, significant medical expenses, home or auto repairs or something you’ve never dreamed of.
The last thing you want to do is be forced to rely on credit cards or a loan which could simply compound the problem.
1. Map Out Your Monthly Expenses
Most financial advisers agree that it’s ideal to keep between three to six months of living expenses set aside in your emergency fund. This is the first step you need to consider when preparing your emergency fund. Be sure to consider both fixed and variable expenses when determining how much you need to set aside. The following are categories of some fixed and variable expenses you need to consider:
rent or mortgage, utilities
life insurance, renter’s insurance, homeowner’s insurance
FICA and income taxes
credit card debt, student loans, car loans
health and dental insurance
if applicable, day care or babysitter expenses
Personal Living Expenses:
groceries, personal items
gas, taxi, or public transportation
Once you’ve taken the time to calculate how much you are spending in these categories on a monthly basis, you can then determine how much you need in your emergency fund. If you are married or living with your significant other, be sure to calculate these costs as it relates to both of you so that you can accurately determine how much you need in your fund.
2. Start Accumulating Funds for Your Emergency Fund
If you don’t have an emergency fund set up yet, or you find it difficult to save money the key is to start small. Accumulating one month’s worth of expenses will take some time, but if you set your immediate goals to be small and manageable you will have a better chance to reach them.
The best way to get started would probably be through your bank or credit union. Open up a new savings account if you currently don’t have one and begin to save with this first. The next step is to get into the habit of making regular deposits into this account. Whether it is weekly, bi-weekly or monthly, create a schedule and stick to it. Once you make saving automatic you won’t even have to think about it.
If you feel it is difficult to begin saving simply start with a small amount. Maybe you begin with $10 a week initially. While this won’t amount add up all that quickly the important thing is to start putting something away and to make it a habit. After a few weeks you won’t even notice that $10 missing so you can bump it up to $15 or $20 after a month or so. You will begin to get used to that money not being there and can slightly increase it again.
3. Set up Your Emergency Fund Savings Account
You want your emergency fund to be easily accessible at any time. You should start with a savings account because it is simple to use and generally does not cost anything. The convenience factor is what is important when getting started. As your account grows you can find an account that earns reasonable interest so that your money is working for you.
By following these three steps, you’ll be well on your way to being prepared for any situation that results in an unexpected financial loss.