Prepare for Life's Unexpected Expenses with an Emergency Fund
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on Monday, June 8, 2020
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Prepare for Life's Unexpected Expenses with an Emergency Fund
Life is many things. One thing it never is, however, is predictable. Despite our best laid plans, we can never truly predict what economic or life circumstances may be in our path. What better proof of that than the coronavirus pandemic? Jobs that were once solid and promising disappeared almost overnight. Financial markets that were in periods of record growth experienced record losses.
But while none of us can predict what unexpected financial challenges may lie ahead, we can prepare our finances by taking an important step — building an emergency fund.
A smart way to manage life's unexpected expenses
Few can argue with the importance of having an emergency fund to help prepare for unexpected expenses. The problem is, many people still don't have one. According to Bankrate's 2019 Financial Security Index, nearly 3 in 10 adults in the United States have no emergency savings. What's more, 25% of people who do have emergency funds, don't have enough money saved to cover three months of living expenses. For those confronted with a job loss or pay cut, that can be a huge problem. Fortunately, though, building an emergency fund isn't all that hard…if you commit to it.
Make saving a priority
Experts have varying opinions about the amount of money you need in an emergency fund, though many agree that six months is ideal. Depending on your expenses, that could be a lot of money, however, the important thing to remember is that you don't have to save the money all at once. Here are some steps to help you build your fund:
- Determine a saving goal. Calculate your monthly bills, including your rent/mortgage payment, food costs, transportation expenses, and other bills, such as student loans. Multiply that by six to determine how much you will need in your emergency fund.
- Review your budget. Analyze your budget to determine how much you could potentially save each month. If you don't have a lot of extra money after you pay your bills, think about what expenses you could reduce. For example, could you get rid of cable or spend less on takeout?
- Open a high-interest savings account. The money you save in your emergency fund should be in a separate savings or money market account. You need to be able to access the money for emergencies, but you shouldn't make your money so accessible that you're tempted to use it for other purposes.
- Arrange to have regular transfers or direct deposits to your account. Once you know how much you can save each month, have that amount automatically transferred to your new savings account. You can set up recurring transfers from your checking account or arrange to have a portion of your paycheck direct deposited into your savings account.
- Give your savings a boost. If you get a raise or a side job, increase the amount you save each month. You'll be surprised at how quickly the money will add up. If you receive a bonus or tax refund, think about saving a portion of that money in your emergency fund.
- Keep saving. If you reach your goal, keep going. You could take a portion of your emergency savings and open a CD to earn higher interest rates. Keep in mind though that if you do open a CD, you won't be able to get at the money (without paying a penalty) until the CD term expires. So, be sure to keep six months of expenses in your savings account at all times.
Having an emergency fund is a great way to protect your financial health in any situation — even a global pandemic.