Emergencies are never expected, but they do happen. In order to prepare financially, we recommend that you have a separate emergency savings fund. A general recommendation is to save enough money to cover three to six months living expenses, which may seem intimidating when you first begin to save. But don’t let that discourage you! Even $5 a week adds up over time. Below are some tips on what qualifies as an emergency and how to start saving.
What is an emergency fund?
An emergency fund is the money you set aside to cover unforeseen expenses. Needing to pay for medical bills, provide for yourself after being laid off, or cover travel expenses home after a death in the family are all emergency situations. In contrast, buying a new TV or paying for routine maintenance on your car should not be considered emergencies. Your normal budget should account for those expenses.
How much should you save?
It’s up to you to decide how much money on reserve will make you feel protected and secure. Three to six months living expenses (enough to tide you over in the event you’re out of work temporarily) is the common recommendation, but your situation may require more or less.
To make the best estimate, you will want to figure out what your normal expenses are. Ideally, you are already tracking your budget and expenses, so you can look back at the past few months for easy reference. If you haven’t been recording your cash flow, you can start keeping track with pen and paper, a spreadsheet, or by using sites like Mint.com that will break it down for you.
What are some savings strategies?
Some easy ways to build up your emergency fund are:
- Collect all your loose coin to go towards your emergency fund
- Have a certain dollar amount direct deposited into a savings account each pay period
- Cut unnecessary expenses and put the extra money towards your savings
Stacey Bumpus, author of “5 Ways to Start an Emergency Fund” also suggests selling unused items on eBay or at your local consignment store. Then use the money you make to add to your emergency fund.
Where should you put your emergency money?
One of the easiest places to put your emergency fund is into a savings account. However, if you are a person that is easily tempted into using your money you may want to put your emergency fund into a seasonal account like a Christmas Savings, a money market account, or a CD. These options give you more limited access to your money, but still grant you access if you really need it.
Have more questions? Let us help you! Visit one of our offices or call us at 800.991.2221.