HOW TO’S TO HAVE AN EMERGENCY FUND
by: Remie Longbrake | published: January 31, 2022
An emergency fund is an important aspect to financial security. It’s there to help in times of unexpected occurrences, such as for a car repair, or to cover deductibles on your insurance. It could also be to help pay for a broken appliance, that way you’re not taking out a loan or adding to your credit card expenses, all of which further puts you in debt.
Of course, nobody assumes such losses will happen, unless you’re in a predicament like your car isn’t running right, or that nature, but if you’re familiar with Murphy’s Law, what can go wrong, will unfortunately.
So this guide can help you understand why you should have an emergency fund and how to get started towards building one. Each person’s situation is different, so you should get a clear understanding of your finances and make a calculated decision when pursuing any financial decision. However, if you don’t have an emergency fund already, having one is a good idea.
Where are we at now.
According to a study done by a Bankrate.com July 2021 Emergency Savings Survey, fewer than one in four adults in the United States have any emergency fund at all. 51% surveyed, have less than 3 months in an emergency fund.
All while the financial security of the American people is declining, the cost of living continues to rise. Many Americans rely on credit cards, loans, via home-equity or other means, plus refer to friends and family when unexpected events occur, which further aggregates the overall savings rate as a whole.
Much of this decline can be contributed to Covid-related circumstances. Could be from illness, job loss, reduced hours, and more. Additionally, labor-shortages and supply-chain issues have pushed consumer prices higher, which through inflation, make goods and services more expensive. And that equates into reduced savings in both directions, higher costs and lower wages.
Why you should have an emergency fund.
There is nothing wrong with having an emergency fund. Some may say that because of inflation, that holding cash isn’t helpful, since inflation is devaluing the dollar. However, having cash available is useful in situations where you need it quickly, as stated previously. Generally, if you keep it in a bank, your cash should be secure for when you need it.
Where to keep it.
The most common place where you will appoint an emergency fund would be your local bank. A credit union can also be a good place. You should certainly call around to see who may offer a more favorable interest rate. Additionally, there are some online-specific banking institutions you can consider. Just be careful on how soon you could withdrawal your money and how much at any given time, as there could be limitation.
You can also consider at home in a safe provided that is an option. Certainly, make sure that is something your comfortable with and your safe is big enough to not be easily transported, it’s fireproof, and tamper-resistant. I say that because almost all safes could be cracked with the right person and tools unfortunately.
What type of account.
Your emergency fund should not be the same as your primary checking. That’s too easy for most to not spend it on groceries, clothes, and non-essentials. The emergency fund needs to be separate. It could be your savings account, provided you consider it an emergency-only account. It could also be another checking account. Ideally, have the account at a different bank that you have your regular transactions occur at. This sort of keeps it out-of-mind so to speak, which can help keep the fund solvent, which can be an issue for many when it’s easily accessible.
However, when it comes to accessibility, you don’t really want your emergency fund to be a Certificate of Deposit, aka, a CD, annuity, and anything of that nature, that would commonly be available at a bank. Reason being is those types of accounts would typically have a time frame where the money needs to stay put. It’s sort of like a contract with the bank. These accounts might have a higher return on your money, but you’re telling the bank you won’t touch your money for a specified period of time. And if you pull your money out earlier, a penalty would apply. Obviously, this isn’t good for an emergency fund, when you need it!
So therefore, it’s best to place your money where it’s safe, but also liquid, to where you can get to it rather easily when it’s needed the most.
How much should you have.
It’s generally recommended, that an emergency fund have 3 to 6 months of savings in place of your regular wages. Of course, that is common advice, and your specific needs could very. Essentially, if you had a job loss, it could take 3 months or more to find work. Of course, it could take longer, depending on your local job market, your skills, qualifications, and sometimes luck just getting another job.
You don’t necessarily know what to expect, so the more you can have available in an emergency fund the more options you have. The other major consideration in funding your emergency fund is covering deductibles. Say you get in an accident. You’ll likely have health care deductibles plus time off work. Of course, you might have health and disability insurance, but many times there’s going to be waiting periods and extra expenses. Plus, if it’s an automobile-related accident, you’ll likely have deductibles on your vehicle to pay as well. Those expenses will add up fast.
Setting boundaries.
The emergency is not for “I don’t have enough money to go out to eat.” Instead, an emergency is an event or loss that affects something important to your health, transportation, and overall safety.
It is also important to talk with your significant other, if applicable, and talk with them about setting up an emergency fund and why it is important to you and the family to have one in place. Families should agree on spending and savings in order to avoid conflicts. One of you might love that coffee at Starbucks, but it’s also costing a lot in the long run. Coffee at home can certainly be an option. And if you look at your expenses, you’d likely find other sources of savings that the whole family can benefit from.
It can be difficult when starting from nothing, as in an emergency fund, to fathom how it’s going to be possible to save money, especially when that hasn’t occurred in the past. As any new habit and goal (hopefully), it should be seen as a positive and you want to feel good about doing it, otherwise it’s going to be more difficult and perhaps even more challenging to meet your savings objective.
If you need to, write the goal out. Goals writing down and in front of us can be easier to accomplish. Have a goal, say $150 per month, then when that is reached feel positive about that, you might celebrate, but be careful of not spending your savings!
So how do you start.
At the very least, if you have nothing in your emergency fund currently, try to save something each paycheck towards funding your fund. It might take some strict error to not go out to eat, less expenses towards discretionary spending clothes, even trips to the store. It might be wise to make a grocery list and only buy what’s on the list. You might also consider shopping at a lower cost type store if one is available, or buy generic when possible.
Having a budget in place can also help. This is something that can help you better understand where your money is going, and possibly help lower your expenses. You might be surprised to know how much you spend where.
You can also consider a money-makeover. This could be reducing credit card fees, restructuring loans to lower interest rates. You might want to refinance to save on interest as well.
Bottom line, it’s not easy, however, not having an emergency fund isn’t going to be easy either. So there can be some difficult choices that have to be made. Regardless, having an emergency fund is a great step for overcoming financial challenges and surprises when they occur.
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