Emergency Fund Guide

Debt

Last updated Feb 16, 2022 | by Kirk Anthony | 10 Min read

Become The Master Of Your Financial Future By Starting And Building An Emergency Fund

Stop Living Paycheck To Paycheck

Many folks in this country are living in constant fear of an unexpected expense. They sweat every time their car makes a funny noise and get faint when they hear about a child potentially needing braces. It is probably no surprise to hear that living that way is not fun. No one wants to worry constantly or feel under the gun because they don’t have the finances to deal with something unexpected.

Many people feel powerless to change this situation and leave it to fate to decide how they are going to handle an unexpected financial event, like a job loss. The good news is that you don’t have to keep living this way. There is a way out and it doesn’t involve anything magical or impossible. Setting up an emergency fund is an excellent way to regain control of your finances, so you don’t have to wake up in the middle of the night in a cold sweat to figure out how you’re going to come up with the money for that repair on the roof of your house.

What do you mean by emergency fund

The Definition Of An Emergency Fund Isn’t Mysterious Or A Vague Concept. An Emergency Fund Is Money That You Put Away For Unexpected Expenses That Are Threats To You Being Able To Take Care Of Your Basic Needs. This Is For Real Emergencies Such As Unexpected Hospital Expenses, And Car Wreck, Or A Failed A/C Unit.

This isn’t saving cash to buy a new Xbox, or to get that new jacket you saw online. When you put away these funds, it is with the mindset that they will not be touched unless paying the expense will put you beyond your household budget and cause you to have to go without a necessity. Again, these expenses need to be something that qualifies as an emergency. Some examples of these types of financial obligations include:

Auto repairs that are extensive and expensive
A household repair, like a hole in the roof or a broken appliance.
To cover your deductible in the case of a car accident/medical emergency
An unexpected medical or dental bill
Job loss

Why should i have an emergency fund?

Having an emergency fund prevents you from having to sweat when life hands you financial lemons. Some people may be thinking that they can use their credit card or personal loan for those types of expenses. A lot of people like to go with the credit card option because they enjoy the perks they receive for using it, like frequent flyer miles. When you compare using a credit card to an emergency fund, it is clear that having a fund is the way to go. Credit cards often have high-interest rates if you don’t pay them off at the end of the month and require you to take on more debt in the long term to take care of a smaller debt now. It’s essentially trading one debt for another.

With an emergency fund, you are essentially lending to yourself at a zero percent interest rate. You can always put back the money that you took out and you don’t have to worry about accumulating more debt. Some would say that the purpose of an emergency fund is to not feel like a major expense is a real emergency. Every person in this country would like to not worry about money and setting up an emergency fund is a great attempt at making that happen.

How Should I Go About Saving For My Emergency Fund?

For lots of people, saving money sounds like a great idea, but they have no idea how to go about it.
They start to question how, why, and when and, before you know it, they feel overwhelmed and stop thinking about setting up an emergency fund. The key is to come up with a workable plan that doesn’t put stress on your current financial situation. There might be a natural inclination to want to save more money than you can, but any amount saved is phenomenal when you are starting your emergency fund. Also, you can always adjust the amount you’re saving later if you find that you can put more away. There are a few different ways you can start saving for your emergency fund, but many people who have success follow these tactics:

Create a budget and stick to it–It’s hard to save if you have no idea how much you are spending each month. By making a list of your monthly expenses, it will probably become clear how much you can afford to save. When you subtract your expenditures from your income, you’ll be left with a potential amount for saving. The key is that, once you’ve set your budget, you should commit to abiding by these limits.
Decide How Much You Want to Save Per Month–Once you see how much you have remaining from your monthly budget, you can decide how much of it you want to save. As stated before, lots of people get discouraged that they can’t save more. Don’t let that dissuade you. First, savings can build up very quickly once the money is consistently being placed into your emergency fund. There’s also the fact that adding more to your savings later is not against any rules.
Put Aside Any Unexpected Money That Comes Your Way–When you get unexpected money, the natural inclination might be to find a way to spend it on something that you want, whether it be $30 or $3000. Instead of doing that, put it in the emergency fund and watch it grow more than you had expected for the month. This goes for any change you get during the month.
Make Plans to Save Your Tax Refund–A great way to boost your emergency fund is by making plans to save your tax refund when it comes in. You can even choose to have the deposit put right into the account that holds your emergency funds.
Adjust your budget for More savings-Look over your budget for anything that you can trim back and shift to savings. Also, if you get a raise at your job set aside more for savings.

What should i aim to have in my emergency fund?

The general wisdom is that everyone should have at least three to six months of salary in their account once it has been built up. Building this much of a cushion will protect you in most of the most catastrophic life events, like the loss of employment. It’s also important to remember that this most likely won’t happen overnight, but, with diligence, it will eventually occur. If you currently have debt, it is a good idea to build up a starter emergency fund of $1000. Once you pay off your debt, you will then build a full emergency fund of three to six months of expenses. There are several ways you can get yourself a little extra to supplement what you have in your fund and build it up quicker. You could get a part-time job and dedicate all those earnings to go into your emergency account. Another great option that I recommend is starting a side business. If you’re someone who has a full garage, or basement, of things hanging around, you might want to consider having a garage sale. This could serve the purpose of clearing out some of your unused items and giving you a good chunk of cash to contribute to your emergency fund.

Take ownership in your emergency fund today

It’s important that when you set up your emergency fund that you put it into an account that is liquid (you will have easy access to withdraw funds). You will also want your account to have access to a debit card or checkbooks. This way, you can pay those emergency expenses quickly and easily.

For an emergency fund account, It is best to keep your money in a high-interest savings account such as Ally bank. To make this convenient open up an interest Checking account at Ally Bank. This will allow you to use the power of a high-interest savings account with the convenience of a checking account with a debit card and Other options would be a regular savings account or a money market account.

However, you don’t want to make it so easy to get to that you have to fight the constant temptation to use it for non-emergency expenses.
You’ll also have to get used to thinking critically about all your expenses to determine whether it is an emergency. There are some questions you can ask yourself to help you figure out whether an expense is an emergency.

Is the expense an unexpected one?
Is the expense on something that needs to be done or would be nice to get done?
Does your expense address a need that is immediate?

If you can answer all three of those questions with a yes, then it is probably justified to use your emergency fund.

Imagine being in a spot in your life where you are no longer living in debt, paying on debt, and an unexpected expense is not catastrophic, just inconvenient. This could be you! Set up your emergency fund, start paying off your debts, and watch as your savings begin to grow. In just a short amount of time, you’ll realize how much less stressful and anxiety-ridden life can be when you have the backing of a solid emergency fund behind you.