“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
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.
This is the Best Way to Handle Unexpected Expenses
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 created 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.
“Do not leave yourself or your family unprotected against financial storms… Build up savings.” – Ezra Taft Benson
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 the first 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 into of course never hurts! 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.
“It may take you months or even a few years to build up an adequate emergency savings fund. That’s okay.” – Suze Orman
When getting started on the road to building wealth, having a plan for your money and making the decision to save for an emergency fund is where it begins. 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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