- 5 min read
- Establish an emergency fund as a first step to protect yourself from loss of income or a surprise expense.
- It takes time to build a rainy day account of 6 months worth of living expenses. Start with a smaller target, like reaching $500.
- Contribute every month to you savings account.
Table of Contents
Emergency Fund: Start Saving Now
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?
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 by putting money into an emergency fund.
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?
Start a Savings Account Today
Do you have a savings account? Is it earning as much interest as it could? Review savings accounts from different providers, to find the one that fits your needs and earns you the most interest.
Why Should You Have an Emergency Fund?
You don't build an emergency savings account just 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.
A rainy day account 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?
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.
Without a rainy day 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 it might be at very high interest rates. If you use your credit cards often, then there might not be any available credit when it comes time to pay for the repairs.
Another reason to build an emergency savings fund is to protect yourself from a decrease in income. Job loss, reduction in working hours, medical issues, and seasonal factors are some of the reasons households face a drop in revenue. Your liquid savings account helps you get by hard times at a minimal cost.
How Much Should You Save? Step 1 - Start Saving
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 a savings account with six months of living expenses. But, don’t get hung up on figuring things out to the exact dollar. The critical 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 savings account 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 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? Step 2 - Fine Tune Your Numbers
You should build an emergency savings fund that covers six months of living expenses. It is an important goal to achieve. Your rainy day fund is the financial tool to deal with unexpected costs. The primary benefit 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.
Use the Calculator below to help figure out the amount of money you need to save. If you keep a budget then it will easier to calculate your monthly expenses.
Emergency Fund Calculator
Calculate Your Emergency Saving Needs
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Can't Afford Medical Care?
The Federal Reserve reports that “over one-fourth of adults skipped necessary medical care in 2017 due to being unable to afford the cost.”
Tips to Help Build Your Emergency Fund
- Focus on expenses, not income.Try to save funds to cover three to six months' of expenses -- not income. Remember, in an emergency, we don't fund vacations, fancy new clothes, dining out or other luxuries. For suggestions on identifying "must buy" budget categories, review a budget guide.
- Take it slowly.Rome wasn't built in a day, and neither is a rainy day savings fund. It's easy to panic with a savings account in the low two-digit figures. Any action you can take to establish a savings account will do you good. Begin by using basic techniques: Each week, transfer $10 to a savings account, and you'll have $500 in a year.
- Do the possible.Think you can't afford to save? Join the club. Save by paying yourself first, and put aside what you can. Establish a monthly savings goal and turn that into a "bill" to pay with other bills. Ideally, banks will automatically transfer funds into a savings account on a set day. If necessary, cut out some discretionary expenses to save a bit. Sell unneeded items on eBay, hold a yard sale, or put change into a jar every evening, and save the proceeds when you cash it in.
- Be prepared with insurance.In addition to savings, cover assets with insurance policies. Having home, auto, health, disability, and life insurance provides peace of mind. Should something happen to the family's breadwinner, the family will not have to cope with the total loss of income and instead can focus on caring for each other. Some people also opt to purchase "umbrella" liability coverage to protect against litigation if someone has an accident on their property, or sues following a car accident. Speak with an insurance advisor annually to maintain appropriate coverage.
Look at the Bigger Picture
Your emergency savings account 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.
You can't go wrong with making putting money into your emergency savings account a priority. As you are building your 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.
Two areas to review are your insurance coverage and your overall financial health.
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.