Emergency funds are crucial to helping you get out of tight financial situations. Not having one — or having one that is inadequate, can leave you facing uncertainty with your finances. There is no way to know what the future holds. An emergency fund could help you prepare you for potential financial problems.
From car repairs to replacing old appliances to the loss of a job, without an emergency fund to help, these situations could have a significant impact on your finances.
How Much Will You Need?
Depending on who you ask, you could get a dozen different answers to this question. The general rule of thumb is that it is best to have three to six months’ salary in savings. Others advise having three to six months’ worth of expenses in savings.
Famed author and businessman, Dave Ramsey, has a different suggestion. He recommends accumulating $1,000 in an emergency fund, first, then paying off debt before returning to your emergency fund where you work toward a goal of three to six months of emergency savings.
The higher your risk is for things like losing your job or facing long-term health problems that could put you out of work for several months, the more stable your emergency fund needs to be. Unfortunately, while you may be able to anticipate some of these risks, many of them catch us all unaware and unprepared. That is why emergency funds are so necessary.
You do not have to start big when beginning an emergency fund. You just need to get started. Having a plan will help you reach your goal quicker. Your first step is to set a savings goal for each month and begin placing that money in a separate account for emergencies.
This step, by itself, is not enough. You will also need to sit down as a family and look for ways to increase monthly contributions to the emergency fund without growing your debt in the process.
Planning for your future financial success accomplishes little unless you are taking equal action to reduce debt. At the very least, you need to actively work to prevent the accumulation of new debt for your family while building your emergency fund.
Finding Ways to Save
If you have searched your budget and are having difficulty finding extra dollars to invest in your emergency fund, you have a few options to consider. Either you can discover ways to earn more money or you can find ways to cut your spending.
Identifying new sources of income are always excellent ways to boost your emergency savings. However, just be aware that your new income may place you in a higher tax bracket that could have you barely breaking even when all is said and done.
For many households, the added costs of adding a job (wear-and-tear on vehicles, work clothes, meals on-the-go, additional child care, and other out-of-pocket costs) make it an unattractive option even before considering the time spent away from family and other potential negatives.
This leaves finding new ways to save as the choice for improving your emergency fund contributions. These are a few great ways to work a little more wiggle room into your budget so you can save for rainy days:
- Rent instead of buying movies (or going to the movies). Better yet, become a member of your local library and borrow new release DVDs for free!
- Skip the coffee house lattes. Investing in an on-demand coffee maker for your home is far more affordable and provides you with an infinite number of flavor options – no long lines either.
- Use a programmable thermostat in your home. It can keep the temperature constant and may help you save on your energy bills each year.
- Eliminate your expensive cable bill. With all the streaming services and free entertainment programming available today, traditional cable can be unnecessary.
- Review mobile phone plans. Closely examine how much you use your mobile phone and decide whether you might be better served with a difference phone package or even a pay-as-you-go mobile phone service rather than a lengthy – not to mention expensive – contract.
There are a number of ways the average family can save money each month for an emergency fund. Those shown above would all be great starts.
Automating the Process
The final step is the easiest for most families. Make your emergency fund contributions automatic. As soon as your paycheck hits your bank account, have your account set up to send a specific dollar amount to the emergency fund account. That way you can watch your savings grow without having to make any extra steps in the process.
Emergency funds are growing in importance day by day – especially if you have a family. You do not have to move mountains to get started, but the sooner you begin, the more help you will have when life’s little emergencies arise.
© BancorpSouth Bank 2018