Why Everyone should have an Emergency Fund
If you have financial goals that you want to accomplish, you can fully expect there to be bumps along the way. However, there is a way to continue working towards your goals without struggling to overcome every unexpected expense. The answer is to set up an emergency fund as your first task to your financial goal. An Emergency fund is a pool of liquid money set aside that will protect you from any unforeseen expenses you may encounter.
Why have an Emergency Fund
Having an emergency fund can be the difference between a small bump in your financial life and complete disaster in your entire life. Instead of being one car breakdown away from not being able to pay your rent, give yourself some cushion for unexpected expenses. And remember, this fund should only be used for necessary emergency expenses such as a car repair or broken furnace. A broken tv or buying Christmas presents is not an emergency. Here are some other reasons that having an emergency fund can be beneficial:
1) Trying to get out of debt
Before paying down your debt, have an emergency fund set up. This will help to stop any unbudgeted expenses from disrupting your progress; providing a clear path to debt freedom. Remember, a credit card is not an emergency fund.
2) Loss of job or ability to work
Not having a source of income for a short period of time can be covered with an emergency fund. This will allow you to be able to cover the necessary expenses while transitioning jobs or having a leave of absence from work.
3) Saving for a goal
Having a financial goal can get derailed quickly when unexpected expenses crop up. Don’t dip into your savings and prolong reaching your goal.
How much to save
Ideally, the rule of thumb is 3-6 months of living expenses. That number should be your bare-bones expenses such as rent, utilities, car payments, etc. It shouldn’t include expenses that you can control like entertainment, shopping, saving for retirement, etc. Don’t expect to have 3-6 months-worth of savings right away. It may take some time to grow your emergency fund.
How to build an emergency fund
Like many things, getting started is the hardest part. Here are a few tips:
1) Set saving goals
Instead of looking at the entire goal, start by breaking it down into smaller pieces. By setting a monthly goal, this will get you in the habit of saving. It will also make reaching your ideal emergency fund goal feel less daunting. If you can, set aside a set amount from each paycheck to go to savings. What’s even better is have that portion of your paycheck directly deposited into a savings account so you won’t even see the money.
2) Cut expenses
Look through your current expenses to see where you are able to trim your spending. It may be the monthly subscriptions that you never use, dinning out too much or those small daily purchases. Little savings each month can add up quickly.
3) Additional Income
Do you have the time and ability get a second job? Can you sell unused items around your home? Additionally, if you receive a tax refund that can be a great once a year boost to your fund.
For more information on building your emergency fund, listen to my interview with Clay Moden on 106.5FM WYRK.
WEEKLY SEGMENT ON WYRK
You can catch our weekly Plan.Protect.Invest. segment live on WYRK 106.5FM at 7:20am every Wednesday. Each week we will have a Sgroi Financial planner on with Clay Moden and the WYRK morning show to discuss financial topics to educate and help their listeners.
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