Why it's important to have an emergency fund
When you're struggling to make ends meet each month, the idea of building an emergency fund may seem impossible to comprehend. But if you are like the majority of Americans who have very little savings (or worse yet, none), all it takes is a job loss or unexpected medical emergency to take you from being "tight" to being destitute. Enter quick loans to the rescue
Financial experts agree that everyone should have at least six months worth of living expenses set aside in an emergency fund. This number can vary depending on whether you have a spouse/partner or children, how much debt you are carrying, and the types of insurance coverage you have. The more you can save, the better off you will be. Remember, there is no such thing as having too much savings.
Many people depend on credit cards to get them through unexpected financial emergencies. However if your credit cards are maxed out, you may be left with very few options the next time you need money for an unexpected bill. Also, this can be a slippery slope. In a survey conducted by LearnVest and ChaseBlueprint, more than three out of ten respondents indicated that credit card debt was a major factor as to why they were not reaching their financial goals.
A significant advantage to having an emergency fund in place is that it allows you to handle unexpected financial needs without taking on more debt. This is a critical step towards becoming debt-free.
What an Emergency Fund Should Cover
An emergency fund is just that- savings set aside to cover unexpected financial emergencies. It should never be used for everyday needs or special wants, such as a new flat screen television or vacation getaway. Open another savings account for items such as these. It's always a smart financial decision to have the money to pay for things you want, even big-ticket items. Your goal is to get out of debt, not add to it.
An emergency fund should cover:
- Job Loss. This is usually the #1 reason experts recommend having an emergency loan fund. Even if you lose your income, your bills will still need to be paid. This includes your mortgage or rent, utilities, food, car payments, and the minimum amounts due on your credit cards.
- Major Medical Expense. Without health insurance coverage, nearly every medical event is extremely expensive. Even if you have coverage, you may be responsible for co-pays or other out-of-pocket expenses arising from a trip to the emergency room or hospital stay.
- Major Dental Expenses. Depending on your dental coverage (if any), a serious dental emergency can cost hundreds or thousands of dollars.
- Home Repairs. Some home repairs won't wait. A leaky roof, a broken water heater, an old heating/cooling system that doesn't work. Insurance may not cover these repairs and that leaves you responsible for them. Plus many people carry high deductibles on their insurance policies, so even if you have insurance, you still have to come up with the cash for the necessary repairs.
- A Job-Related Move. The days of companies paying the moving expenses for new employees are pretty much over. If an opportunity presents itself for a new job, you don't want to be in the position of having to turn it down because you can't afford to move to another state (or city).
- Unanticipated Travel. No one likes to think about it but sometimes there is a death in the family and you need to get to the funeral. Last-minute plane tickets can be very expensive. You wouldn't have to worry about it if you have an emergency fund.
How to Get Started
- Determine Your Expenses. Go over your expenses. These include mortgage (or rent), car payments, utilities, food, insurance, and credit card or other monthly bills. Take your total living expenses and multiply that number by 6 (for six months worth of savings). This is the amount you will have as your goal. If you want to set aside more than six months worth of income, multiply by however many months you choose. Start small if you need to, but start.
- Make Cuts. Once you determine your monthly expenses, it's easier to see where you can make cuts. Start putting your loose change into a jar every night. Eat at home instead of going out (it's nearly always cheaper). Brown-bag your lunch. Rent movies rather than buying theatre tickets. Small changes can bring big results.
- Live On A Cash-Only Basis. Put away your credit cards. You will never get out of debt if you keep adding more debt. If you can't afford to pay cash for an item, don't buy it. If you are an impulse shopper, stay away from the mall or online retail sites.
- Take Advantage of an Automatic Deduction. Find out if your place of work offers this service. Arrange to have a certain amount deposited directly into your savings account (emergency fund) each payday. Start with 5% and then increase it as you are able. Many people find it easier to save when they never see the money in the first place.
- Have Easy Access To Your Savings. With an emergency fund, you want to be able to access your money easily and quickly. This usually means having a regular savings or money-market account. Once you have three or four months of living expenses saved up, you can look into putting some of it into a Certificate of Deposit which earns more interest.
- Don't Touch the Emergency Fund for some quick cash. Unless you have no food in the house or are losing your home to foreclosure, leave your emergency savings alone.