Have you ever considered what you would do in the event you or a family member had an unexpected expense come up? What would happen if your home flooded, you were to lose your job, or have an accident that sidelined you for weeks? Do you have the financial means to cover such expenses?
Life is unpredictable and that is why we encourage everyone to build an emergency fund even before starting to invest for the future.
What is an emergency fund?
An emergency fund is an account used to cover unexpected expenses and to provide support in the event of a financial jam. Typically, we recommend you put these funds in a separate account, even a savings or checking account depending on the amount, and use them only in the event of an emergency.
A good rule of thumb is to have enough in your fund to cover three to six months of living expenses, preferably six months to be on the safe side.
Having an emergency fund can help you make sure you avoid borrowing or incurring unnecessary credit card debt when life throws you the unexpected.
Here are 4 Steps to building Your Emergency Fund!
- Set up automatic deposits
Building six months of savings into an emergency fund can feel overwhelming for some, but you can make it happen slowly. One of the easiest ways to start building a reserve is to have a set amount of your paycheck directly deposited into a separate savings account. You want to keep funds separate from a bank account you use daily to avoid dipping into your reserves. You may even consider opening an account at a different financial institution than where you typically bank or invest, this will force you to think before you tap these funds.
- Review your budget
If there’s no money left after paying your current monthly expenses, now may be a great time to review your current expenses. Are there monthly expenses you can trim or eliminate and use the extra funds to build your emergency fund? How much are you currently spending on eating out or on your daily coffee stop? Start by eliminating the easy ones; setting unrealistic savings goals sets you up to feel deprived or a failure at saving. Neither of these is the road to success.
- Save your tax refund
Another option to add funds to your emergency fund is to save your tax refund. Before you make plans to spend your refund, even before you receive it, consider putting a portion or even all of it into the emergency fund. This is a great way to quickly boost your cushion.
- Pay down credit card debt
Most importantly get rid of credit debt. If you are carrying a revolving balance on your credit card but have money in savings, don’t hesitate to use your savings to pay off credit card debt. You don’t want to have to manage paying down debt while dealing with a personal or financial emergency. Pay off debt with the highest interest rate first; then stop using the card. Work toward using credit cards only for convenience (or for points), and spending only what you can pay off each month.
What happens when you need to access your emergency fund?
What’s the emergency fund for? Well, it’s there for that unexpected emergency! So here is what you do if that occurs. First and foremost, review your current spending and determine what are essentials and what can be temporarily cut. Next, if you have credit or loan debt, make sure to pay the minimum balance to maintain your credit rating and avoid debt collectors. If you are truly struggling with paying bills, contact the creditor to discuss a payment schedule, a new minimum payment or a courtesy refund of any late fee you incur while figuring things out.
Once you have reviewed your expenses and have your debt under control; determine how much of your emergency fund you will need to use until things get better.
You may consider reaching out to a financial advisor to help with reviewing your current savings plan and putting a new plan in place. Saving for your future is very important both for an enjoyable lifestyle and for all the great opportunities yet to come; funding an emergency fund should be your first financial priority.
By Susie McLane and Liz Miller
*This article was originally posted on the Ellevate Medium page: