Unlike a usual savings account which you use to reach a specific goal, an emergency fund exists to provide a financial cushion for unexpected expenses or financial emergencies. Generally, the emergency savings fund account should be enough to cover between three to six months of living expenses. That may seem like a lot of money to keep in your bank account, but remember that in an emergency, you’ll be happy for any amount of money saved because it will buy you time to find a long-term solution.
Here’s how you can get started.
Whether it’s a car breaking down, an unexpected home repair, or a job loss, life can throw you a curveball when you least expect it. While these situations are challenging, having an emergency fund can help make them a little easier to overcome, at least from a financial perspective. Building an emergency fund can help give you a sense of financial security and confidence. When unplanned expenses do arise, you can tap into that emergency fund before going in debt or needing to change your long-term financial goals.
Your first step should be to calculate the ideal amount to save. In this case, that means enough to maintain a simplified version of your lifestyle. Add up a month’s worth of daily necessities, such as rent or mortgage payments, bills, groceries, and car payments. Exclude expenses you can do without in the case of an emergency, such as new clothes, going out to eat, and other simple luxuries. Once you’ve calculated this number, multiply it by the number of months for which you’d like to plan, generally three to six months.
Remember that this is your ideal amount to save; it shouldn’t stop you from starting your emergency fund with an easier goal to hit. The stash can be used for smaller financial emergencies, such as an unexpected car repair, medical procedure, or travel to attend to a serious family matter. However, the intent is to keep this money set aside for when you need it and replace it as soon as possible if a financial emergency drains it.
When choosing where to stash your emergency savings, consider a place where you’re less likely to dip into the money for other expenses. Here are some ideas for where to stash your funds:
Next look at your spending habits and find ways to set aside money. You don’t want to wait until there’s a real need for your emergency fund to start building one. By then, it’s too late. Commit to making consistent progress to building your emergency fund, even if it feels small. Below are some suggestions to help you decide what works best for you:
Get creative when deciding how to save. You know your spending habits better than anyone and which tricks work best for your budget.
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Disclaimer: The information contained herein is for informational purposes only, as a service to the public, and is not legal advice or a substitute for legal counsel. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.