Too many people today don’t have an emergency fund or a savings account. Your emergency fund is the safety net in the event you get sick, loose your job, have unexpected car repairs, medical expense, etc. General guidelines you’ll hear from financial planners as to how much you should sock away into your emergency funds varies from 3 to 12 months of your monthly living expenses. Personally, I find the happy medium to be 6 to 9 months of your monthly living expenses, but ultimately the decision is yours based on your level of security. Before you start, you have to make sure you have created a balanced monthly spending budget in order to pay your bills and necessary expenses. This monthly budget will be your base for setting and attaining your emergency fund goal.
Why Having an Emergency Fund is Important to Building Wealth
Whether or not you’ve ever given it much thought, the phrase paying yourself first is probably something you’ve heard at some point. The principle of paying yourself first means exactly what it implies…which is to pay yourself first, and your emergency fund is one place to start. Having an emergency fund is the foundation for building wealth and the backstop that will help you from going into debt. Given the purpose of what an emergency fund is, it should be readily accessible, but not so readily accessible that you will be tempted to make withdrawals for every day spending. It’s important to only use your emergency funds for what it is intended for…emergencies!
An online bank could be one good place to stash away that money for those rainy days. Have automatic deposits set up so that way the fund will grow without you being tempted to interfere with it. The rate of return on your money here isn’t the main objective, but more about it being safe from you getting your hands on it until it’s absolutely needed for a financial emergency or crisis. Shopping around for a high interest account to “park” your money never hurts of course! Just make sure to find out and be aware of any minimum balance fees, withdrawal fees, penalties, etc. before making your decision. The last thing you need is to find out the money you’re working hard at saving for emergencies is being eaten away by fees.
“Your goal should be to pay off your credit card bills in full at the end of each month and set aside money toward your emergency savings.” – Suze Orman
There are different ways to go about deciding how much to contribute to your emergency fund depending on what works for you. There are so many different approaches for saving money you just have to find your approach. For example, you could start off with a set amount of at least $10 to $20 a month and make a point to contribute more when you can. You could set it up as an automatic deduction from your paycheck or set it aside manually if you’re disciplined enough.
If you’re able to be more aggressive with the amount you’re able to save, another method would be to save 10% of your monthly expenses or more aggressive yet, 10% of your income. Whatever the amount or method you’re able to do, the important thing is to DO IT! Make it a habit, make it consistent. Replace every dollar that comes out, if you have to dip into it. Set your goal of saving for 3 to 12 months of expenses depending on your level of security and situation. Once you’ve reached your target, it doesn’t stop there. That habit of saving for you’re your emergency fund will serve you well to save for investing. The habit of saving and starting with your emergency fund truly is the foundation for building wealth. Don’t let life events or unexpected expenses control you financially. Get control over your money, so your money doesn’t have control over you!
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