Creating an Emergency Fund
Creating an Emergency Fund for Difficult Times
We all have our own definition as to what an emergency is, but in this article, we’ll give you the true meaning of an emergency, and how to prepare for one. Creating an emergency fund is one of the most important steps to take.
There’s two things for sure about any emergency – they can hit you from anywhere, and they will always happen at the worst possible time. And, if you don’t have a cash buffer handy, you’re in for some hard times.
Does Covid-19 ring a bell? Those who set up an emergency fund are having an easier time meeting their living expenses than most others. This is a perfect example of how and why the need to create an emergency fund.
There’s no need to panic if your emergency fund isn’t big enough, and in some cases, you may have no fund at all. You can be prepared; it just won’t be as easy.
First of all, what do we mean by an emergency?
Here are a few examples of a NON-Emergency. Your annual summer vacation; kitchen renovation; and a hot clothing sale at Macys.
Those other large expenses such as braces for the kids or new tires for the SUV, which are not really an emergency either. You should be putting money away for these because you know these expenses will be coming eventually and you can pay cash instead of using a credit card. Creating an emergency fund is not for expenses such as these.
Let’s clarify an emergency a little further. By definition, it is urgent, necessary, and always unexpected. If you get laid off from your job or get injured in some way, are good examples.
Always remember, an emergency fund is for when something really serious happens, not for some way to enjoy a luxury item you’ve always wanted. Don’t dip into this fund unless you have a real bona fide emergency.
How much should I put in an emergency fund?
There is no one size fits all when setting up an emergency fund. However, most planners agree that a fund that will cover 6 months of living expenses is the bare minimum. Today, with the uncertainty of Covid-19, some are beginning to stretch the time frame to 9 to 12 months.
A couple of years back, we had a healthier economy, and job prospects were better, so a smaller emergency fund was okay. But now, we still don’t know the long-term effects of Covid-19 plus a lot of businesses have made permanent cuts in staff. It’s almost impossible to plan ahead.
Many families in the past had both spouses bringing in the money. Now, with most schools closed, the children are at home getting their education by online means and one of the spouses is with them. Income is greatly reduced, but expenses usually remain at the same level.
With no emergency fund, these families are hurting. Furthermore, the Senate and the House are still bickering as to whose bill will do the most for the American people. The result is that the people who need help the most have to wait because of the egos involved.
It’s easy to see the need for an emergency fund that covers living expenses for 12 months, and maybe even longer.
One of the best ways to establish an emergency fund is by creating a workable budget. In that way, you are able to budget a certain amount each month that will go into this fund.
For peace of mind, and your survival, we strongly encourage creating an emergency fund as soon as possible. Create a budget, get your debt paid off, and eliminate unnecessary expenses. Get a handle on your financial picture and put every dollar to work.