Basement flood. Totaled car. Unexpected health scare. These are all scenarios that anyone in their right mind would want to avoid. Not only are these emergencies a hassle on your personal time, they are an unexpected and immediate stretch on your wallet.
What is an emergency fund?
An emergency fund is an easy to access account that holds four to six months’ worth of living expenses. This fund is to help cover the cost of unexpected financial demands, including covering the expenses of job loss. At the end of the day, an emergency fund is a way of providing peace of mind that your financial health will not be at risk in the event of an emergency demand on your wallet.
When disaster hits, you want to be able to cover your expenses and not rely on credit cards or borrowing money to cover these costs. Below are a few simple steps to building your emergency fund slowly, so that you can sleep well at night knowing you and your family are covered.
Step One: Budget
You can’t know how much you need to save until you know how much you’re spending. Total up your expenses for the last few months (an online tool like mint.com can help immensely with this), and see what six months of expenses would be.
Step Two: Eliminate and Negotiate
Now that you’ve budgeted, you might start to notice spending that is unnecessary and that you can eliminate from monthly expenses. Do you really need all those cable channels? A daily Starbucks run? Figure out what you can remove from your expenses, and you’ve already freed up some of your income to put in your emergency fund.
Another way to shrink your monthly expenses is to negotiate bills where you can. Cable, Internet, cell phone, insurance – the list goes on. If they refuse to negotiate, shop around. You might be able to rack up significant savings.
Step Three: Choose your amount
After fixing your budget and finding savings where you can, decide on the weekly or monthly amount you need and are able save to get your emergency fund where you need it to be. Since you have eliminated the unnecessary spending, you should have some room in your budget to establish a regular savings withdrawal. But don’t be overwhelmed by the daunting task of saving six months’ worth of expenses. Start small. If six months is a stretch, aim for another more manageable goal, say $1,000, and build your fund from there.
Step Four: Make it automatic
The easiest way to fall short of your saving goal is to forget to transfer the money out of your everyday account. You can start by simply opening a savings account and move the amount designated for savings to this account. But your number one ally is automatic transfers. Set up the amount to transfer on a weekly or monthly basis, so that you don’t have to remember to do anything. Additionally, if you start this process soon after opening the account, you won’t feel like you’re “missing” money.
Step Five: Use during Emergencies
It may seem obvious, but only use your emergency fund for true financial emergencies. The latest iPhone release is not an emergency. Buying the latest and greatest big screen TV because your old one broke is not an emergency. An emergency fund only works if you truly save it for the times when you need it the most. If those other glimmering gadgets are enticing, you need to work on an additional savings goal, but only after you’ve prioritized your emergency fund!
Originally posted on the Memphis Chamber Big Ideas blog at http://www.memphischamber.com/Newsroom/SBC-BIG-IDEAS/March-2016/Steps-to-Building-a-Healthy-Emergency-Fund