One thing you can be sure about in life is that something unexpected will happen to you. A job loss, accident, bad decision, or even a mistake can cost you monetarily. Hopefully, you have the proper insurance to cover most of the surprises in life, but chances are, you still will have to come out of pocket for part of the expenses. This is why having an emergency fund is crucial for your financial well-being.
I’ve talked about an emergency fund in other posts, but it’s something I can’t stress enough, since I see too many people without a fallback plan in emergencies. Credit cards, or borrowing from others should be a last resort. It just compounds the problem or may not be an option. An amount set aside in an easily accessible account designated strictly for emergency purpose, is using both wisdom and prudence in handling our money.
How much should be set aside depends on your specific situation: if you have children, carry significant debt, and the type of insurance you have. A good rule is to set aside 3 – 6 months of non-discretionary expenses. Meaning, even if you find yourself temporarily unemployed, those bills will still be due. Rent, lights, gas, and debt payments are all non-discretionary expenses. The cell phone bill and the cable bill can be eliminated if necessary.
3 – 6 months of expenses may seem like a lot to have saved, but the key is to build up to that amount. Start small and aim to save $500, then $1,000 and eventually you’ll have one month of expenses saved up. Or, you can start saving $10 to $20 a week, based on what you can afford, and try to build on that amount every month. After that, it gets easier as you are developing the habit of saving. Just keep saving until you reach your goal. Hopefully you won’t need the funds before then, but if you do, you will have some funds placed aside to use, and then you rebuild.
Making your savings automatic is another great way to start. Having the money taken directly from your bank account on a regular basis will help you accumulate the money without missing it too much. Start with a savings account at your local bank and when you have accumulated the minimum to avoid paying the bank fees, move the excess into an online savings account where you are earning a higher interest rate. Some examples are included below.