EMERGENCY FUND
Don’t Get Caught Without it!
Don’t Get Caught Without it!
We have previously discussed saving your money for a down payment on your home. In the near future, we will talk about what some call the envelope system of saving for particularly expensive items. But the foundation for all of that is what I would call an emergency fund. Room to breath.
Life happens.
We all know that, and we know that life costs money. The expected expenses we will ease with the envelope system, but what about the unexpected expenses. Your kid gets sick. Somebody backs into your car.
You know approximately how long your refrigerator will last, but when will your check engine light come on?
Does stupid stuff get in the way of accomplishing financial goals?
Maybe you’re chugging right along making all the right moves to achieve your financial goals then… BAM! Something happens (A car accident? A root canal?) and you’ve got to come up with some cash to deal with it. This is when you need emergency savings to handle unexpected situations and expenses. Otherwise, a little problem can turn into a big problem, or, at least a big setback.
How much do I need in my emergency fund?
Start with a simple solution (that is sure to help you sleep better at night).
You can always start with this approach: add up the amount of all your insurance deductibles (medical, auto, and renters/homeowners) and set that as your base for your emergency savings account. Having the money to cover your deductibles means that, in the event of a serious emergency like a car accident or injury, you can cover the deductible without going to a loan company.
Being able to cover your deductibles is a great start. With this approach, you’ll be able to deal with the most common financial emergencies. Even if you just start with an emergency fund of just $300 to $500, it will help you feel more prepared and less panicked if an emergency hits.
Eventually, you will find it comforting to increase your fund to a month’s income amount and then two and three.
It doesn’t matter how much you start with, just remember two things.
Start saving in that fund NOW and don’t stop until you have the amount you want. Cal Newport said it best when he said “Start small and start immediately.”
Don’t spend ANY of it if there is no emergency.
Keep the money in a bank or credit union where it is accessible, but where it does require you to jump through a hoop or two to put your hands on it. Make it inconvenient to transfer to your cash or checking account.
Can I Party on My Emergency Fund?
Before you decide to use your emergency savings, consider this.
Is it really an emergency? A flat tire is an emergency. A broken arm is an emergency. Regularly occurring expenses like birthdays, holidays and new school clothes are not. If you know when something is due, plan for it during the year.
Is it a want or a need? Wants are nice to have but not essential. Eating out or going to the movies are not needs. Needs are the essentials, the basics of life that you must have to survive.
Do you need it right now? These funds need to be saved for broken appliances, emergency room visits, or car repairs ONLY.
Remember that whenever you do decide to use your emergency fund, you can feel proud that you were able to avoid using your high-interest credit cards or borrowing money from friends and relatives. Feel good about using your emergency fund for its intended purpose!
Then start saving it back up again!
Originally published at https://thereasonablerealtor.com on October 15, 2019.