You’ve created a financial strategy and you have a budget. You’ve set your goals and reviewed tax strategies so that you can possibly make more money from the money you earn.
Then life comes at you with a hammer and you’re not financially prepared.
Do you require building an emergency savings account? A few questions could aid in making this decision:
Could a $500 cost be a major blow to your budget? an enormous way?
Do you think losing your job will make you withdraw savings from your 401(k) money to cover the costs until you can find a new job?
Does the cost of an emergency operation for your pet (poor friend!) be a burden on your account? What happens if you blow up the engine of your car?
If you have answered “yes” to any of these questions, you’ll require an emergency fund.
What can you tell whether it’s an emergency expenditure
What does “emergency” mean to you? It will vary from person to individual. This is a good test of whether the cost is unanticipated urgent, inevitable, or unavoidable?
Unexpected The news is that you’ve lost your job and are now responsible for the charges.
Unavoidable: It’s more expensive to repair your refrigerator than to purchase an entirely new model.
The dentist you see just suggested you purchase two crowns (not ones that go over your scalp).
The reason it’s not used for is, well it could be for things like a brand new sofa. or membership to the tennis club. or a brand new bike. These aren’t urgent.
How much should I have in my emergency reserve?
Set mini-goals. Start by trying to save $1,000. Don’t get caught up in the number of dollars; the crucial thing is to start. Keep adding until you’ve had a monthly expense.
Your goal should be to save 3 to 6 months’ worth of expenditure. Utilize our emergency savings calculator to figure out the amount that’s needed for you. It’s possible to save at least six months’ worth of funds if you’re the sole breadwinner or are earning a fluctuating income.
Where do I place the money?
Save your emergency funds in an account in a bank that is fluid and accessible, but not overly easily accessible. This means, put the money in an account for savings accessible online, but not via an ATM, from which you might be tempted to take it out. (You know, out of sight, out of the mind.)
Choose a high-yield savings account that has a minimum amount of balance. (Though the yield on high yields isn’t as good these days.) You can check online for savings rates at the bank and market rates.
The image of a thumbtack. TIP: Make use of your emergency funds instead of the use of a credit card or loan
If you do not have zero balances on your credit card and you are not in a position to pay for it, it’s wise to use them to “finance” your emergency by increasing your credit card debt. (And even if there is an unpaid balance, make sure you review the fine print of your credit card before you decide to fund the cost of an unexpected emergency.)
If you decide to take out a loan, you’ll probably have to pay fees, interest as well as penalties. This is an expense to your bank account.
Also, remember that when you’ve used an emergency savings account, begin building it up immediately to be ready for the next time you’ll need it.
How do I begin my emergency savings fund?
Here are two ways to increase your emergency reserve.
Automate it. Make money directly deposited from every paycheck into a savings account. If you put aside the equivalent of $25 per week, at the time two years are over, you’ll have $2,600 in savings.
To make it easier to build it faster, transfer funds from a tax refund. If you have a surplus in cash by the close of the month, you can include that too. (Those dollars are earmarked for purposes like this.)
A fund for emergencies could take a massive burden off your shoulders in the event of an unexpected expense, which makes it more of an issue to handle rather than a financial crisis.