Start Your Emergency Fund Now
Sixty-six percent of American households with under $100,000 in income said they could not handle an unexpected expense of $10,000, according to research recently conducted by
Money Magazine. Whether or not you currently have one, an emergency fund is essential to your ability to manage unexpected financial challenges and maintain your overall financial health. Even if you're in credit card debt or behind on those all-important retirement savings, don't let this important step fall by the wayside. Most experts recommend saving enough in your emergency fund to cover your family’s basic expenses for three to six months.
Reasons You Need an Emergency Fund
- Unexpected Medical Expenses You can exercise obsessively and eat an exemplary diet, but that still doesn't protect you from the vagaries of everyday life; accidents do happen. Medical emergencies can arise at any moment, in a variety of ways. Make sure you are financially prepared.
- Car Repairs Cars never seem to break down when you are ready for it. If you lose your wheels for a significant period of time, you could risk your ability to commute to and from your job and maintain your family responsibilities.
- Job Loss
Just because the economy is recovering doesn't mean you're exempt from a possible job loss. It can happen at any time, and you're going to need a cushion to get you through the rough patch until you can land a new job.
Major Home Repairs
Again, your AC unit or roof aren't likely to give you any updates on impending repairs. Just one unexpected home repair could put you in a tough financial spot.
Peace of Mind
Financial stress can negatively affect your health and personal life. A solid emergency fund can help you sleep better at night, knowing that you can survive most potential financial calamities.
How to Create An Emergency Fund
If you do not yet have an emergency fund, don't try to shoot for an unrealistic goal such as $10,000 in the first few months. Kick things off with a contribution of a small percentage of your income—even as little as $20 per month can get you off to a good start (although $100 per month would be better; and ideally, experts recommend 15 percent of each paycheck).
Set Short-Term and Long-Term Goals
Establish a long-term goal of six months' worth of expenses, and then set baby steps for how you plan to get there, for example, $100 per month for the next three years.
Budget Your Money
You can't fully stock an emergency fund without first learning to budget your finances.
Use mobile banking and budgeting apps to get organized. Once you enter all of your income and spending details, look for ways to reduce your monthly output.
Once you have your budget in place and you have come up with a monthly surplus, ask your employer to transfer that amount from your paycheck to your emergency fund. If it never hits your regular spending account, you will be less likely to tap into it.
Deposit All Free Money
Get a bonus check at work? How about a raise? Even if you receive cash gifts on your birthday, shoot all or some of that money straight to your emergency fund. Do not use this “found money” for discretionary purchases; instead, use that additional income to its best advantage.
Choose a Liquid Interest-Bearing Account
The last thing you want to do is tie up your emergency savings in a fund that penalizes you for withdrawing your money when you need it. Although a Roth IRA (independent retirement account) is a good choice for long-term savings, it might not be right for easy access in an emergency. Investigate high-yield checking and savings accounts, and don’t forget to look into local credit unions, which may offer higher interest rates. Even if you earn only 2 percent, you will be making your money work for you while having full access to it.
[Any reference to a specific company, commercial product, process, or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]