Why You Need an Emergency Savings Fund
Are you ready to face unexpected events? Maybe your car breaks down, you need expensive medical or dental care, or your heating breaks down in the wintertime. How are you going to pay for those expenses and still have money left over for your everyday bills? What if your income is reduced due to job loss or a cut-back in hours. Do you have a cushion to fall back on?
In a dramatic a report released in 2018 the Federal Reserve said,
“Four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money.“
Are you one of this 40 % of Americans whose finances are so tight that you can’t pay for a car repair or medical bill of $400 from your savings? Do you have a plan to fix that?
One way to pay for an emergency expense is to take out a loan, but people who don’t have enough savings to cover a $400 bill qualify only for a high-interest, expensive loan. While this can be a short-term solution, it is far less preferable than dipping into a specially designated rainy day savings account.
It can be hard to start saving when you are just getting by, but there is no way to get around the fact that savings are a vital component of your financial health. The first place to start saving is putting money into an emergency fund.
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Your Emergency Fund: What is It For?
An emergency fund with enough money in it protects you from the harm that even a small, unforeseen expense can cause. If, for example, your car is the only way you can get to work and it breaks down, how will you pay for the repairs so you can get to work and keep your job? Without an emergency fund, you either have to borrow the money from someone or put the cost for repairs on a credit card. There isn’t always someone willing to lend you money, and you may not have enough available credit on your credit card to pay for the repairs. Even if yd credit cards often have high interest rates.
Obviously, it is better if you have the money in an emergency fund. You will have the independence and flexibility to pay to solve the problem on your own, without borrowing money (and asking for money is not very pleasant for you or the person you ask). Your emergency fun protects you from using your credit card, which probably has a high interest rate.
You don't build an emergency fund to cover unexpected expenses, you also do it to protect yourself from a drop in income, whether from a reduction in hours at work, a medical issue that causes you to miss work, or a job loss.
You don’t want to start thinking about your emergency fund when you have an urgent need for money. Start building funds now, to increase your security and improve your financial health.
You can accept the wisdom of building an emergency fund with six months of living expenses and, at the same time, be unsure how much you actually need to save. It is true that knowing your monthly living expenses is part of the picture, but don’t get hung up on figuring things out to the exact dollar. The important task is developing the discipline to start building the savings and making a habit of putting away money each month.
If you make a budget to get a clear picture of your income and expenses, that is great. But you can start working on your emergency fund without one. It will take time to get to six months of expenses. That’s fine. Cut your spending by eliminating an expense or finding a cheaper alternatives. Set a small savings goal to start; aim to save $500 as quickly as you can, while paying all your bills.
Your Emergency Fund: How Big?
You should build an emergency fund that covers six months of living expenses. It is an important goal to achieve. Your emergency fund is the financial tool to deal with unexpected costs. The primary effect is practical- a surprise bill won’t sink your financial ship. A secondary benefit is psychological; the knowledge that you are prepared for a financial shock gives you security and peace of mind.
Your emergency fund is one type of savings you should build, but not the only one. Good financial health habits include saving money for retirement, investment, college education for you or children, and major purchases. Each of these is important to your long-term financial health, but start with your emergency fund.
Emergency Fund Saving Calculator
Calculate Your Emergency Fund Needs
Use BIlls.com's simple Emergency Fund Calculator to find out how much you need to save in an emergency fund. Calculate the amount you need, based on your income and budget, and the number of months that you want to cover. Once you have your target, compare that to your current available emergency fund savings.
Keeping a budget helps you understand how you are spending your money. A deeper analysis allows you to discover which are your basic expenses. Do you keep a budget?
Calculate your essential monthly expenses. Think about a case where you don't have income for a short-term and you need to cover you essential monthly expenses. You can cut out luxury items, but there are may bills that can't be avoided.
There is no one size fits all answer. However, most experts recommend at least three months of living expenses in an emergency fund savings account. Our recommendation, is that you set a goal to have at least six months of liquid assets that are in a safe andn easliy accesible account.
Now check your actual savings against the amount you need in an emergency savings fund. The calculator willl assess your situation and give you a quick recommendation.
How Vulnerable Are You?
Your emergency fund exists to protect you from financial shocks. It should not be your only line of defense. Weigh how vulnerable you are to common problems that can cause financial havoc. Two areas to review are your insurance coverage and your lifestyle.
You pay for insurance to protect yourself from financial harm. If you have no medical insurance, then you don’t pay a monthly premium for a policy, but you’re responsible for covering your medical costs, and medical care can be costly. Not having adequate medical insurance gives you a solid reason to build your emergency fund rapidly, faster than someone else with the same financial situation as you, except with excellent medical insurance coverage with low deductibles. Your emergency fund could be the difference between receiving proper medical care or not getting it.
Do you have anyone who is financially dependent on you? What would happen if you die or if you were disabled? Life insurance and disability insurance, long and short-term, could be essential priorities.
Use Your Big Picture Skills
A useful way to measure your overall financial health is measured by looking at how you save, spend, borrow, and plan. They are all linked together. Building good financial health is about breaking each area down into smaller parts to determine the areas where you are strong and where you are weak. This helps you make realistic priorities and then act on them in a thoughtful way.
You can't go wrong with making putting money into an emergency fund a priority. As you are building your emergency fund, keep in mind ways your other financial choices and consider:
- How you can adjust your spending to put more money into savings.
- Whether you can pay any of your debts more efficiently.