How to Build a Successful Emergency Fund
What is an Emergency Fund?
An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly.
What Does an Emergency Fund Pay for?
An emergency fund should cover 3-6 months of living expenses. I know many of you are wondering what that consists of. Many people leave out living expenses they didn’t even think about when saving an emergency fund.
What Living Expenses Should Be included?
Start by estimating your costs for critical expenses, such as:
- Housing
- Food
- Health care (including insurance)
- Utilities
- Transportation
- Personal expenses
- Debt (per month)
These are typically your needs, not your wants that should be fixed other than vehicle maintenance. These should all be expenses you do not need to cut from your budget in the event of a job loss or major catastrophe. For example:
- Entertainment
- Dining out
- Nonessential shopping
- Vacations
- Savings for a second home, college, or other goals
These are all expenses that should not be included in your emergency fund because all of these are extracurricular and not essentials.
When Should I Save More Than 3-6 Months of Expenses?
Putting aside 3 to 6 months worth of expenses is a good rule to follow, but in some real-life scenarios, it may not be enough.
If you’re able, you might want to think about expanding your emergency savings if:
- It’s a recession (High unemployment rates)
- If your industry is physically demanding (Injuries can occur)
- If layoffs are common at your company for budget reasons.
- If your income isn’t steady (Commission based)
- If you’re retired and you have your money in high-risk investments
Something Is Better Than Nothing
The important thing is that you’ve started saving something when many people aren’t saving anything. Keep in mind, everyone may not be able to save as quick as other due to different financial circumstances. The good thing is, THAT IS OKAY!! Don’t panic. You can get there eventually by stashing away smaller amounts on a regular basis. The best way to go about doing so is by automating your saving. This means that a portion automatically goes to a savings account while the remaining goes into your checking. This helps people stay on track because this action is automatic and many times people don’t even realize it. If you do this every time you’re paid, over time you’ll eventually meet your goal.
As an example: Let’s say you set aside $30 a week in an emergency fund. At the end of 2 years, you could have $3,120 saved. Increase that amount to $60 a week and your savings could grow to $6,240. Make it $75 a week and you’ll see an even larger amount saved.
Here Are Some of the Top Emergencies People Face:
- Job loss or cut in hours
- Medical or dental emergency
- Unexpected home repairs
- Car troubles
- Unplanned travel expenses
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