Many people live without the security of an emergency fund to help them through sudden expenses. Due to this, many people end up in debt when unexpected events occur in their lives.
This leaves them with no reserve funds to pay their bills, thus leaving them in a worse position than they started out.
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What is an Emergency Fund?
Emergency funds are meant to be used for sudden events such as car problems, medical emergencies, and home fixes.
They can also double as a reserve account in the event that you lose your job and need to pay your regular bills until you find a new one.
How Much Should I Have in My Emergency Fund?
The exact amount you should save in an emergency account varies based on who gives the advice. Typical recommendations run from 3 to 6 months’ worth of regular expenses (though extra padding never hurts)!
Many financial advisers also recommend that you grow your funds after you hit this mark. You should aim for at least one year’s worth of expenses saved up by the time you retire – on top of your retirement account.
The ultimate goal is to make sure you have enough to cover unexpected expenses or get you through a financial rough patch.
How Do I Get Started Saving?
Consistently placing money in your emergency account will save you the exorbitant expenses of a high-interest loan or credit card during tough times. Thus, it’s essential to get started sooner, rather than later.
However, this process can seem intimidating if you don’t know where to start.
The key is to start small – even $1 per month is $1 more than you were saving before.
You can also start with financial apps, such as Acorns, that will tuck away the change by rounding up your debit card purchases. But, for the purposes of this article, we’re going to cover a few simple steps to start and maintain your emergency fund over time.
Step 1. Set a Monthly Savings Goals
Making a budget and setting your savings goal is the first step to building your emergency fund. (Of course, sticking to your plan is next!)
Your goal can be as big or small as fits your budget, but make sure you can adhere to the amount you set. When it comes to growing your money, consistency is vital.
Of course, you can always raise or lower the amount you set aside later to better fit your budget.
Step 2. Cut Unnecessary Expenses
Everybody is guilty of purchasing things they know they should. But, when it comes to becoming financially responsible, cutting out these unnecessary expenses is essential to getting a head start.
The time will come when you can afford that hot tub. For now, though, a hot shower on a cold day will have to do.
Step 3. Use Your Tax Return for Your Emergency Fund
It’s a once a year gift from the government – and a once a year gift you shouldn’t spend frivolously.
Your tax return is not free money from an unseen gift-giver. Rather, it’s your money that you’ve overpaid to the IRS throughout the past twelve months. Thus, when it hits your bank account, it’s best to put it right back into your budget.
And one of the best places to stick extra money is safely in your emergency savings fund. There, it will accrue extra interest and provide even more padding for the next disaster.
Once more, that hot tub will have to wait.
Step 4. Make Money on the Side
Step 5. Know When to Use Your Emergency Fund
While many people can commit to saving for an emergency on paper, actually using that money for emergencies is another story.
It’s important to keep in mind that emergencies are not wants, they’re needs. Items such as last-minute birthday presents and expected regular payments don’t fit the bill.
But, if you were to lose your job and have trouble finding another, then paying your regular bills could be a good use of the money. In this case, paying your regular expenses becomes an emergency.
If you don’t stick to using your emergency fund for emergencies, you run the risk of not having enough to cover the next true disaster. This could leave you high and dry when it matters most.