How many of you have had an unplanned expense recently? How much was it $500? $1,000?
Unplanned expenses are anything but, unplanned. Sure, we don’t know when they will occur, but they will occur.
Being able to “plan” for those expenses will save you a lot of grief, and will probably save you money.
If you don’t have a rainy day fund, how do you pay for an unexpected expense? Your credit card?
Having an emergency fund has many benefits, and having one set up can make a big difference in your life. But how do you save for emergencies? What characteristics does an emergency fund have? And when should you use it?
What is an emergency fund?
It’s exactly how it sounds. It’s an account, usually a savings account or a money market account, that you designate for emergencies.
You set this up to “plan” for unexpected expenses. For example, you set aside money for the future in case your car breaks down or your furnace stops working.
Why do you need one?
The emergency fund is designed to save your monthly budget. Unexpected expenses can be expensive and can do significant damage to one’s monthly budget.
If you have money set aside for a rainy day and something unexpected happens, you can use the money from your emergency fund to pay for that expense. Your monthly budget isn’t affected at all.
What are the characteristics of an emergency fund?
There aren’t really many characteristics of an emergency fund. Here’s essentially what you need:
- You need an account separate from your checking account.
- This separate account needs to be easily accessible and liquid.1
- You should have 3-6 months worth of expenses saved in this account.
- You can have too much.
- Having 3-6 months, or even a year is fine, but anything else should be saved and invested for your retirement. (Savings accounts earn next to nothing in interest)
What strategies can you implement to save for an emergency?
There are many things you can do to save money for your emergency fund.
- Create a budget
- List your income
- List your necessary expenses (housing, transportation, food, etc.)
- List your discretionary spending (fun money)(keep this to a minimum)
- Compare income to expenses and adjust as necessary
- Reduce your expenses
- Cut the cable, use subscriptions instead
- Eat out less, or don’t eat out at all
- Rent movies, TV shows, and books from the library
- Walk or ride your bike instead of driving (when applicable)
- Control your utilities (open windows during summer, layer up during winter)
- Automate your savings – Set up automatic transfers from your checking to your savings. Have it take place at the first of the month or every Monday. If this happens first, you can’t spend it away.
When should you use it?
You should use your emergency fund whenever you have an unexpected expense that could disrupt your monthly budget.
Here’s a small list of examples:
- Car repairs
- Home repairs
- Emergency, short-notice flights
- Life expenses post-job loss
When shouldn’t you use it?
Your emergency fund shouldn’t be used on large once per year costs like:
- Property taxes
- Owed taxes
- Holiday spending
Unplanned expenses can wreak a person’s monthly budget. It helps and makes a dramatic difference to have money set aside for a rainy day.
Besides the financial aspect of having an emergency fund, you also have a psychological benefit. Peace of mind knowing that you have money available if a large expense were to come into your life.
For more information about emergency funds and for our disclosures go to www.crgfinancialservices.com
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