If you’ve ever heard the term pay yourself first, your emergency fund is where you should start. Emergency funds should be readily accessible, but not so readily accessible that you will be tempted to make withdrawals for every day spending. Online banks could be a good place to stash away that money for those rainy days. You shouldn’t be so concerned with the rate of return on your money here, but concerned more with the fact that it’s safe from you getting your hands on it until it’s absolutely needed for financial emergency/crisis purposes. Although, shopping around for a high interest account to “park” your money into never hurts! Just make sure to find out and be aware of any minimum balance fees, withdrawal fees, penalties, etc. before making your decision.
Make Saving for Emergencies a Habit!
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. If you have to dip into it, replace every dollar that comes out. 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.
“Do not leave yourself or your family unprotected against financial storms… Build up savings.” – Ezra Taft Benson
Having some extra money set aside for those unexpected expenses is the only way to get out of debt, stay out of debt and above all, build wealth. Too many people today don’t even have a savings account let alone an emergency fund account. Saving should be one of the first things you do with your money not the last thing. Your emergency fund is the safety net in the event you get sick, loose your job, have unexpected car repairs, medical expense, etc. Imagine the peace of mind it would give you, just knowing you have extra cash available if some unexpected financial burden comes up. Not only will you have the means to cover it, but it will also keep you from going into debt over it.
General guidelines you’ll hear from financial planners as to how much you should sock away into your emergency fund ranges from 3 to 12 months of your monthly living expenses. I find 6 to 9 months of your monthly living expenses to be a happy medium, but ultimately the decision is yours based on your level of security and your life circumstances. For example, the smaller your family responsibilities are the 3 to 6 month range may work fine for you and visa-versa. Once you decide how much you want to put away into your emergency fund then you have to make sure you create a monthly spending budget in order to cover your bills and necessary expenses. This monthly budget will be your base for setting and attaining your emergency fund goal. This will be the foundation you will be building your wealth on.
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