Life is highly unpredictable – day to day, hour to hour, circumstances can change, and not always for good. Although you may not always be physically or emotionally prepared for a major crisis, you can have the peace of mind to know you are financially prepared. With a little planning, saving, and maintenance, you can create a cushion of funds to support you in a crisis and eliminate some stress when the expected happens. Here are tips on how to make it happen.
Set aside enough funds for 6 months of living expenses. Not every emergency situation will require this much money, but 6 months of income should allow you either:
1. Enough money to cover major unexpected expenses such as vehicle tows or repairs, plain tickets, hospital bills, etc.
2. Enough funds to support you for a few months in case you get laid off or otherwise find yourself suddenly unemployed.
An even better idea if you have a two-income family is to set aside 6 months’ worth of both incomes. Yes, this may seem like a large chunk of money, but you will appreciate it in the odd chance that both you and your spouse lose your jobs at the same time.
Use your emergency funds only in an emergency. The important part of an emergency fund is having it available in a true emergency. Dipping into your savings for regular or impulse expenses on a regular basis is a sure way to drain your emergency fund, and you are lowering the chances the money will be available when you actually need it. If you find yourself dipping into your emergency fund frequently, it’s a good sign your budget may need some tweaking. If you plan to put more than 6 months’ worth of living expenses in your savings, you may be able to dip into it for slightly less urgent (but still unplanned) expenses, such as the down payment on a new vehicle you need or an amazing house you stumble upon.
On the other hand, if you plan to put more than 6 months’ worth of living expenses in your savings, you may be able to dip into it for slightly less urgent (but still unplanned) expenses, such as the down payment on a new vehicle you need or an amazing house you stumble upon. Being an over-saver may allow you to jump at opportunities others are unable to.
Replenish what you use. If you use emergency funds, don’t forget to replenish them. The ideal is to maintain 6 months’ worth of expenses at all times. Life isn’t always fair with dealing out emergencies. You could be stuck with two major emergencies in a short time frame – another example of why it’s better to save a full year or 6 months’ worth of two incomes. The sooner you replenish your fund, the sooner you’ll have peace of mind that you’re prepared for the worst.
Make it easier to save by using payroll deductions. If you have electronic banking, the best way to start building your emergency fund and keep it maintained is to set aside contributions from each paycheck. As a rule of thumb, you won’t miss money you don’t get to see. Even a small amount such as $20 can quickly turn into hundreds over the course of a few months.
Emergency funds are a key component of financial stability and responsibility. With money in the bank for a ‘rainy day,’ you will be significantly less stressed in a crisis, and in turn less of a burden on friends and family members who might otherwise have to bail you out. You don’t have to be a fatalist or expect the worst to happen – just be prepared for it.