An essential part of your financial plan, an emergency fund is the piggy bank you bust into when the unexpected happens. Surprise medical bills, temporary loss of employment or even some car repairs can be just enough to set people on a path of financial ruin.
Nearly 3 out of 10 Americans scramble when an unexpected expense happens. Large or small, unplanned financial expenses always seem to hit at the worst time. So we want to make help ensure you’re building habits now that you will be thankful for later.
What is an emergency fund?
Simply put, an emergency fund is a cash reserve that is set aside specifically for unexpected expenses or financial emergencies. Things like car repairs, emergency medical bills, or even loss of income.
Why do I need one?
While most people lean heavily on a credit card or personal loans for unplanned expenses, the debt can potentially have a lasting impact. Even more so if you’re dipping into other savings, like a retirement fund, to cover the bill.
By ensuring you have flexible cash set aside for these things that pop up allow you to protect yourself from months, or potentially years worth of interest payments.
How much cash should I set aside?
The answer to this question really depends on your lifestyle. Think about the most common surprise expenses you’ve had in the last year, and how much they cost.
Is your growing family accident prone? Do you have a car that is starting to experience some minor issues, but you’re not ready to buy a new one just yet?
Even if you’re living pay-check to pay-check, setting aside a small amount every pay period can provide financial security, even if it feels incredibly difficult to do.
Let's talk action steps!
Everyone has different strategies when it comes to getting a savings account started. Taking into account that you may have a limited amount of money to work with during each pay period, or that your pay trends may fluctuate seasonally – one or two of these habits will go a long way in helping you positively impact your ability to financially navigate an emergency.
Set a Goal
Stay motivated by defining your savings goal. To ensure your goals stay realistic, and that you don’t feel defeated, be sure to:
• Define the total amount you want to save
• Establish a timeline of how many weeks/months you want to hit your target savings goal within
• Figure out what the weekly savings target needs to be to hit your timeline
• Don’t forget to brainstorm on your personal expenses and see where additional weekly and monthly savings can be made to grant you a little more breathing room
Create a Savings System: Set It and Forget It!
Consistency is key when it comes to saving money, so make sure you put a plan in place that allows you to consistently contribute to your emergency piggy bank. Setting up automatic, recurring transfers from your checking to your savings on every payday is the easiest way to ensure you’re staying active.
Leverage One-Time Saving Opportunities
Throughout the year, we all have opportunities where an influx of money comes in. Birthdays, tax refunds and cleaning out the basement for a yard sale are all opportunities to set aside a portion of that money for later.
Monitor Your Progress
Encouragement to keep going is often as simple as checking in on your savings account every now and then. The gratification of seeing your account growing will help motivate you to keep up the good work.
Celebrate Your Successes!
Saving money is no easy feat, so celebrate your accomplishments! Find ways to reward yourself for good habits so you’re more likely to continue the trend even after your emergency fund is setup! And don’t forget that once you’ve crushed this goal, set your next one!
When to Use the Emergency Fund
Now that you have your emergency fund in place, set some guidelines on how the money can be used. Remember that every unexpected expense may not qualify as an emergency, so be selective on how you spend it. After all, the whole point of is to avoid having to rely on personal loans or other forms of credit that can turn into debt – turning a one-time emergency into a much larger bill simply because of interest and fees.
And most importantly, don’t forget to replenish it as you use it!
