Are you ready for a financial emergency? If not, you are not alone.
According to a recent survey from Bankrate.com, 57% of Americans don’t have enough cash to cover a $500 unexpected expense.
What is an Emergency Fund?
An emergency fund is a bucket of liquid money set aside for unforeseen expenses such as medical bills or car repairs. To be liquid, the money must be readily accessible. Certificates of deposit (CDs) and savings bonds do not qualify as liquid.
How Should I Set-Up an Emergency Fund?
Start your emergency fund using a savings account or money market savings account. Since we can all be tempted, make sure it is not TOO accessible! Consider keeping these funds at a different bank than your checking account.
How Much Should I Save?
Leading experts recommend having enough money in your emergency fund to cover at least 3 to 6 months of living expenses. Whether you need closer to 3 or 6 months coverage depends on your situation.
- If you are part of a two-income household or you’ve had a steady job for several years, the amount can be closer to three months of expenses.
- If you are a one-income family, self-employed, or earning straight commission, the recommendation is to save for at least six months of expenses.
What Types of Expenses Should I Consider?
Think about your essential expenses. How much is your mortgage? How much do you pay in health insurance premiums and prescriptions? Here are a few other items to estimate.
- Personal Expenses
You don’t need to include expenses for anything you’d cut from your budget in the event of a job loss or major catastrophe such as vacations or dining out.
What If I Can’t Save Enough?
Don’t panic. Something is better than nothing.
The most important step is getting started. Begin to stash away small amounts on a regular basis either weekly or with every paycheck. If you receive any unexpected income like a bonus at work, save it. Adding a hundred dollars here and there will get you closer to your savings goal.
Increasing your liquid savings and being able to cover unexpected expenses most affects your financial well-being, as discovered by The Consumer Financial Protection Bureau. Decide to lower your anxiety and be confident that you can handle whatever life throws at you by building your emergency fund.