You should always expect the unexpected! You can be prepared for the unexpected by having an emergency fund set aside. An emergency fund is the best defense against a financial emergency.
Many people doubt they can afford to start, build, and maintain an emergency fund. But the truth is you can't afford to not have one.
A financial emergency could be an auto or home repair, medical expense, job loss, death, or anything else requiring a significant amount of money on short notice.
Unfortunately, these challenges force many people to deal with the situation by using credit cards or taking out a loan. This simply makes the situation even more challenging in the long-term.
How Much is Enough?
The general rule is to keep between three and six months of living expenses in a readily accessible account. Of course, that's just a general rule. The proper amount for you will depend on your specific situation. No two situations are identical.
Consider if children are part of the equation. How much debt are you currently carrying? What types of insurance coverage do you currently have? The answers to these questions will allow you to make an informed decision about the size of your emergency fund.
Sudden loss of income is the most common reason for needing to dip into an emergency fund. If there is a job loss, bills still need to be paid. Finding significant employment can take at least a few months. Don't be caught without an income and without money in savings!
It is always best to have a plan in place for the worst-case scenario. It’s easier to handle the smaller emergencies, like buying new tires for the car.
Situations will arise. It's simply part of life.
It's Okay to Start Small
If you don't already have an established emergency fund or if saving money is difficult for you, starting out small is fine. Even accumulating a single month of living expenses can take some time. Set small, manageable goals and the odds of reaching them will be better.
The simplest way to get started is by opening a savings account at your bank. This should be an account separate from any other account you may currently have. Get into the habit of making consistent deposits. Set a schedule and stick with it.
Even just $10 or $20 a week can be a good place to start. Try to slowly increase the amount you’re saving each month. Over time, you may want to move those funds into an account that can earn more interest.
After attaining the minimum balance levels, money market accounts and certificates of deposit can be better solutions.
Being Prepared is Always More Pleasant Than Being Caught Short
Have discipline and only use this money in times of financial emergency. A vacation or a new wardrobe is not an emergency! Avoid dipping into your emergency fund to pay for other large expenses that aren’t true emergencies.
Having an emergency fund is a big part of maintaining financial stability. It protects you and your family from unforeseen emergencies. Get started today! Every little bit can make a difference.
Everyone faces financial challenges at times. If you're not ready when the time comes, you'll hate yourself for not having made the proper preparations. Be prepared for the inevitable challenges of life. Not only will it be easier to weather the storm, you'll sleep better knowing you're ready.
I highly recommend a high-yield savings account (such as Capital One 360, or Barclays Bank). You can link these accounts directly to your primary checking account, and transfer money on a schedule or just when you feel like it. As an added benefit, High Yield Online Savings accounts offer great interest rates as an even bigger incentive to save.