How to start an emergency fund
How to start an emergency fund
An emergency fund can keep your finances afloat during unexpected circumstances. It's important to have savings available for unforeseen job losses, medical expenses, unexpected repairs and more. As with most finance-related issues, pre-planning is a key factor in successfully weathering financial storms. However, statistics show that 28% of Americans have no emergency savings.
How to save
It’s recommended that families and individuals have at least three months of their salary saved for emergencies. This money will allow you to manage expenses for a few months in case you unexpectedly lose your job.
It might be daunting to think about setting aside savings while trying to cover your monthly expenses, but if you set a plan to save, you’ll be more likely to stick to it. Consider opening a specific savings account for your emergency fund and set an automatic transfer to it on your paydays. That way, the savings will come out first and can’t be put off by other expenses. Once you have a large enough sum saved in your emergency fund, you can transfer some savings to short-term bonds or high-interest yielding savings accounts that you can still access fairly easily when needed.
Should you save or pay down your debt?
If you have debt, you may be asking yourself if you should pay down your debt before saving for your emergency fund. Although there are pros and cons for each approach, it’s important to strike a balance. Paying down your high-interest debts should always be first priority, but that doesn’t mean that you shouldn’t aside at least a small amount of money each month for your emergency fund. Not only will it help prevent you from having to borrow money in case of an emergency, it will help you build positive financial habits as well! Even if you can only contribute $25 to your emergency fund to start off, your fund will continue to grow as your debt decreases.
When to use it
There may be times when its tempting to tap into your emergency fund like paying for a vacation, paying down your debt, or putting a down payment on a home or car. Determine ahead of time a list of expenses that would be acceptable to use your emergency fund for. Ensure that they are true emergencies such as covering your living costs in case of unemployment, medical emergencies, home repairs needed because of a fire or natural disaster, emergency veterinarian bills, unforeseen vehicle repairs or even unexpected tax bills.
Although it might be hard to live beneath your means as you try to save for your emergency fund, it will most definitely pay off in times of emergency. You’ll have peace of mind knowing you can avoid debt in times of job loss, medical stress and uncertainty. By doing some pre-planning and saving today, you’re promoting financial health for your future.
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