Life happens, but too many of us are still unprepared when it does. This article will help you plan for your needs so you can rest easy when that day comes.
Why You Need An Emergency Fund
You cannot plan to avoid emergencies, but you can plan to cover them when they appear. With an emergency fund, you will be better able to mitigate against unexpected financial setbacks, whether they are acute, like a car repair, or more long-term, like a job loss.
Access to this cash will give you some immediate peace of mind. You’ll save on both stress and money by avoiding more debt. You’ll be able to focus on acting now, without worrying about paying later.
How Large Should Your Fund Be?
Most advisors recommend that your fund comprise of three to six months’ worth of your monthly expenses. If you have a very steady income you can probably keep your fund closer to the three month mark. If your income tends to vary in size, however, or if you just don’t get steady paychecks, you would be better served by a larger fund covering six or more months of expenses.
Wherever you fall on that scale, don’t be intimidated by the prospect of accumulating all that money. Something is always better than nothing, so just focus on starting to save!
How To Start Building Your Fund
Convinced now that you need a fund but have no idea how to start?
1. Get a Savings Account:
A great first step would be to open a new savings account solely for your emergency fund. You’ll want this account to be easily accessible, but still clearly separate from the accounts you usually pull from. As much as possible, avoid tapping into this fund unless you’re truly having an emergency. When deciding on an account, look for banks which offer high-yield savings accounts of at least 1% interest, so your money can do a little work for you while it waits to be needed.
2. Determine how much you need:
Next, you should calculate exactly how much you’ll need to save in order to hit your emergency fund goal. To do this, you should add up all of your regular monthly expenses (rent/mortgage, utility bills, car payments, regular medical bills, loan payments, food, etc.), then multiply that figure by the number of months you plan to save for. If, for example, your monthly expenses totaled $2500, and as a freelancer, you decided you wanted to stash six months’ worth of expenses in your fund, your emergency fund savings goal would be ($2500 x 6 =) $15,000. Not a fan of math? Try using this emergency fund calculator instead!
3. Move towards your savings goal:
Whatever your fund goal is, accumulating that amount of cash may seem a bit daunting at first. Don’t allow that to overwhelm you! Instead, focus your aim on maintaining a steady build. Consider setting a monthly savings goal for the account and automatically having it transferred out of your primary account. You could also consider having a portion of your paycheck directly deposited into it by your employer, so you never see the money and aren’t tempted to spend more than you should. If you get a substantial tax refund, consider using that to help beef up your emergency fund, or get it off the ground.
4. Rinse and repeat:
Over time, you’ll eventually find yourself needing to dip into your fund. Don’t consider it a loss if your fund takes a dive from time to time. That just means it served its purpose! As expenses come up and life happens, just repeat these steps as needed in order to replenish your supply!
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Thank you very much for the support and kind words!
Thanks.