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Having an emergency fund is important because life hits unexpectedly. Should anything happen you want to be able to take care of yourself and your loved ones. This article will show you what types of emergencies you should prepare for, appropriate sizes for emergency funds, and the process for actually building them. Let’s get started!
What sorts of events qualify as emergencies?
Financial emergencies are problems or situations that if not resolved immediately will force us to face adverse consequences. Examples include unforeseen medical expenses, getting laid off at work, urgent home or car repairs, deaths, and legal matters. Events that don’t qualify as emergencies include new clothes for a friend’s birthday party, discounts on a vacation you weren’t expecting, or buying the latest smartphone. It’s important to distinguish these because otherwise we’d be wasting our discipline and funds. Next let’s discuss how much money should go into our emergency fund.
How much should you have in your emergency fund? How much should you save each month?
Different financial experts recommend having 3, 6, and 12 months of living expenses in your emergency fund. We’ll recommend the midpoint of that range at 6 months but encourage you to set smaller targets initially when starting. Hitting those smaller targets will help you develop confidence and momentum in reaching your final goal. 6 months is typically enough time to find a new source of income and cover most common types of unforeseen expenses. Bear in mind the larger your fund the larger your cushion in case of emergency and vice versa. To calculate your living expenses you can start from your budget if you keep one. If not simply do a mental listing of your monthly expenses and adjust based on your actual expenditures each month. So for example if you spend $2,000 a month you’ll want $12,000 in your emergency fund. If it’s $3,000 then $18,000 and so forth. If you can afford to save more each month do so but you can start with saving as little as $50 to $100 each month.
How to build an emergency fund
Building your emergency fund is simple as all you have to do is put money away. That doesn’t mean it’s easy though! It can be tough psychologically putting that money away but because you’re determined you’ll see it through. Ideally you should have a separate savings account where you keep your emergency fund and nothing else. This can be in a separate account with the same bank or a separate account with a different bank. The benefit of keeping it in the same bank is that you can schedule automatic transfers to make it easy to save. The benefit of keeping it in another bank is that it will be less likely you dip into it when you shouldn’t.
Treat this fund like a bill and pay yourself first. If you’re already tight on cash consult our article Easy Ways to Save Money and use those ideas. We’ll repeat a few of the ideas here for convenience. Sell stuff you don’t use like idle furniture, extra TV’s, old games/toys. Find ways to make side income (cleaning, tutoring, writing, etc.). Dump all your pocket change into a jar at the end of the day.
We’ll wrap this article up with a quote from a wise man who knows a little something about managing money:
“Do not save what is left after spending, but spend what is left after saving” Warren Buffett.
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