The best ways to put money away for all your unexpected life occurrences
Everyone could use a little (or a lot of) extra cash on hand. Emergency funds can be used for all unexpected situations that occur in life—from broken furnaces to hospital visits.
“There are many people out there who are living so paycheck to paycheck that a blown transmission would send them into bankruptcy,” says Brad Smith, CEO of debt management company Rescue One Financial in Irvine, California. “An injured child or a natural disaster could easily be handled with additional funds.”
No one wants to be strapped for cash, especially in an emergency. That’s why it’s wise to start building a just-in-case fund today.
Keep this number in mind - Seven. It’s how many months’ worth of expenses you should aim to have in your emergency fund.
“Everyone has wants, needs and desires when it comes to spending money,” says Pete D’Arruda, financial radio show host, author and president of Capital Financial Advisory Group in Cary, North Carolina. “Make sure you have seven months’ worth of emergency income available for the needs.” If that’s not possible at first, work your way up by saving little by little and adding to your fund only when feasible.
Pretend it’s a monthly bill - You wouldn’t miss a deadline on an important payment, would you? One of the best ways to build an emergency fund is to treat it like an actual bill. Adding a designated amount (determined by your income and expenses) will ensure that you continue to grow your savings. And like any company would, charge yourself late fees when you miss a payment (of course, that will go directly into your fund).
“The forced savings should feel like a bill pay transaction that is done on the same day of every month,” Smith says. An easy way to make sure you “meet your deadline” each month is to set up direct deposit from your paycheck to automatically transfer money to your fund.
Use it for real emergencies only - One of the most common issues among people who aren’t able to grow a solid emergency fund is that they take money out when they think they need it, but it may not be for a real emergency.
“An emergency fund is for the unexpected,” explains Carrie Coghill, a Barron’s top 100 financial advisor and the director of consumer education for FreeScore.com. “For example, appliances that stop working, getting laid off from a job, a long illness or an accident. You use an emergency fund for any expense you cannot foresee.”
One way to avoid this is to always make sure you know what bills are coming up when.
“People budget to save and put away an emergency fund, then they forget to budget for an annual insurance expense or car expenses, etc.,” Coghill says. “You can foresee your car insurance expense next November, for example, so it is not an emergency.”
Don’t make it easy to access - “Do not get access to it via debit card,” Smith advises. “And if you are issued a checkbook, hide it.” Instead, open your emergency fund somewhere you can access your money but it’s just not as easy to get to.
“I like using an account away from my normal checking account to build a psychological wall between my spending habits and my emergency fund,” says Ray Lucia, a Certified Financial Planner and nationally syndicated radio host.
Have patience - While we all wish we could snap our fingers and our emergency funds would magically increase, unfortunately, that isn’t realistic.
“Rome wasn’t built in a day, and neither is an emergency fund,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Debt Relief. “Any action you can take to establish an emergency fund will do you good. If you transfer $10 to a savings account each week, you’ll have $500 in a year.”
As long as you’re continuing to build it each month, it’s okay to start off slowly.
“When you pay off a credit card with a $50 monthly payment, increase your savings by that $50,” explains Gallegos. “With the same outflow you have today, you’ll be paying yourself.”
Creating an emergency fund can pay off down the line, so get started today and watch the savings grow.
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