Emergency Funds: They’re More Important Than You Think
Emergency funds are pretty self-explanatory. If you or someone you know racks up some serious bills, either because of a hospital visit, a lost job, a financial calamity, or something else that blindsides you, then you can stay afloat rather than be trapped by a mountain of high-interest debt.
In theory, everyone would love to have such a fund on the backburner on the off chance something does happen. In reality, most people don’t have such a fund, and when disaster strikes, they’re woefully unprepared.
Unfortunately, insurance doesn’t always cut it
You probably have a whole slew of insurance bills you pay every month. So why would you need an emergency fund as well? Insurance is supposed to protect you during emergencies, right?
Well, yes and no. Health insurance for instance can dramatically reduce the cost of a visit, and may have a maximum that you’re going to pay out of pocket. But those maximums can be reached very quickly, and they don’t exactly have a low ceiling. You could easily be saddled with a car-purchase worth of debt in a matter of minutes, which may have been avoided with a solid emergency fund.
What should my emergency fund look like?
We would suggest having a fund capable of covering—at the very least—three months of living expenses. You may hear anywhere from as much as a year’s salary to as little as a couple thousand U.S. dollars. The amount you should have is not set in stone, but you should err on the side of caution as much as possible here.
Secondly, the fund should be easy to get to. It shouldn’t be stored in an account that will fine you for taking it out quickly.
Because it’s easy to get to, it may be tempting to take money out of it on a common basis. Don’t do it. When a real emergency happens, you’re going to wish you had the money in this account. It could save you from massive interest costs that could ruin your finances. One trick is to never keep the card with you. Store it away until you need it.
This should be one of the FIRST accounts you create—not the last
You may be saving up for multiple things as once. It’s not uncommon to have accounts for a home, a new car, a general savings account, a retirement account, etc. The truth is, we recommend that the emergency fund is one of the first accounts you need to create. Identify a fixed amount of money you’d like to have in it, and start saving. Everything else can wait until you’ve successfully built up your emergency fund.
If you have debt, consider that as part of your monthly expenditures. That needs to be steadily brought down as well. Do your best to accommodate both any remaining debt and an emergency fund at the same time.
So what’s the first step?
First, find out how much you’d like to have in the account. Next, you’ll want to create a list of living expenses that you have. Tally up your monthly expenditures, compare that to your salary, and add to your emergency fund accordingly. To make sure you are always putting the money in, set up an automatic transfer with your bank.