6 Tips On Creating An Emergency Fund
Want to know how creating an emergency fund will help? Read these 6 Tips
Do you make it a point to pay all of your monthly bills early or on time, pay your credit card balances in full to avoid interest charges, and put money away for retirement? If you are, that’s terrific! But have you begun creating an emergency fund for yourself?
An emergency fund sometimes dubbed a ‘rainy day’ fund is a side reserve of finances intended for emergencies that seem to pop up at the worst possible time. If you do not have one, you must make the right moves to establish one.
Simply put, an emergency fund is for exactly what its name states, putting money aside to cover unexpected expenses that you did not include in your budget. These can include medical problems, covering for a lost job, car repairs, etc. As accurately stated by “Murphy’s Law,” if something can go wrong, it will go wrong.
Most of us like to view life through rose-colored glasses, assuming that these things will not happen to us, but they always creep up on us when we least need them to. But an emergency fund makes incurring these unplanned expenses much easier to weather.
The real question is how much does one put away into their emergency fund. The optimal answer is to have enough to cover three to six months of living expenses. Of course, this is not a ‘one-size-fits-all’ type of thing.
If you can maintain more than 6 months of living expenses in the emergency fund, you are even better off. With Covid-19 issues today, many are suggesting at lease one year of living expenses.
When the economy is doing well, people can justify having a smaller emergency fund. Some people felt ‘safer’ knowing that both they and their significant others had jobs. But what if one of those incomes was to suddenly cease?
Today’s economy is not at all great, regardless of what some ‘very stable geniuses’ at the White House may claim. With two incomes, people get used to a particular lifestyle and have expenses that often exceed what they can manage on just one income.
When you are relying on both incomes, adjusting to just one is tough. If your spouse becomes sick, for example, you might be suddenly dropped into that one income position.
We all want our families to be taken care of even if something negative was to suddenly affect our lives. The job market isn’t exactly rife with positions at the moment, and ideally, you would want to have a year’s worth of reserves in your emergency fund to cover dire financial situations.
It is important to consider how much you feel would be sufficient to protect your family in case something terrible occurs.
So, let’s say you are creating an emergency fund, where do you put that money? Some would argue that it should be invested, but doing so leaves your fund at the mercy of a constantly fluctuating stock market. We like to think more conservatively and prefer to keep our money more secure.
One solution is to invest in a conservative mutual fund, as it would not be affected by stock investments in a fluctuating market. These mutual funds tend to experience a steady, yet slow, growth, and could increase the value of your emergency fund in some period over a year.
But where can the money for this emergency fund come from? Here are a few ideas:
● Pick up some extra funds with a second job
● Sell off stuff you no longer need that has some worth in a garage sale
● If you have some short-term credit card debt, consider using your tax refund to pay it off and use the money you are no longer spending on those bills to supply the emergency fund
● Eliminate some discretionary payments from your budget
● Shop around for better home and automobile insurance rates
● Cancel gym memberships to retain some extra cash per month
Not having an emergency fund could result in being put in a tough financial predicament if something were to come up. For that reason, we recommend that people work out a budget that will help set up certain financial goals, as well as helping you get a better handle on your full financial standing.
An accountant and tax preparer by profession, Gust’s true passion lies in his company blog titled “HBS Financial Group, Ltd.”. Through this venue, he not only tries to teach individuals about budgeting, money management, and taxation but he writes the majority of the articles as well.