Check engine lights turn on, last minute trips come up, company layoffs occur, and unanticipated medical bills add up. Life happens, and sometimes that means unexpected expenses. When there isn’t a cash cushion available to soften the blow, unforeseen circumstances can cause an otherwise stable financial situation to slip into crisis.
Finding money last minute is frustrating and difficult. Funds tied up in investments may be inaccessible, and high-value assets, like homes and vehicles, aren’t liquid and won’t sell overnight. They won’t be your saving grace in sticky situations. What’s the solution? Having an emergency fund!
Emergency funds can alleviate the stress of finding large sums of money when you need it quickly, so establish an emergency fund by setting money aside in a designated account. Although it can be reassuring to have the money accessible in your checking account, it’s easy to spend spontaneously when funds are at your fingertips. When money is safely stored in a savings account, you’ll be less likely to spend it. If no emergencies arise, your funds will remain out of sight and out of mind – but still be readily accessible.
How to start an emergency fund:
The first step to saving money is evaluating your current expenses. Are you really using your unlimited data plan or premium cable package? Is it necessary to go out to eat so often or pay to get your nails done? While it’s important to enjoy some simple pleasures in life, make sure the add-ons are truly worth your investment. If you aren’t utilizing some of the services that you’re being billed for monthly, those are the expenses to cut. You can also look for wallet-friendly alternatives like having a movie night at home and cooking instead of going out on weeknights.
As you evaluate expenses, it is important to create or refine your monthly budget. Taking a step back to evaluate what you bring in versus what you owe each month can help you identify cash that is unaccounted for or not being utilized efficiently. When you have a big-picture view of your dollars and cents, it’s easier to decide what portion of your income to put aside regularly into an emergency savings account. Then the easiest way to commit to that savings plan is to set up automatic transfers or direct deposit. These regular transfers lessen the burden of remembering to put money aside.
Besides routine saving, another way to boost your emergency savings fund is to look for opportunities to earn some extra cash. Are you willing to work past the normal work hours to earn some overtime pay? Have you considered starting a freelance or part-time job to earn some extra cash? Could you sell an asset for a sizeable profit? Instead of spending the supplemental funds, put at least half of the income into your emergency fund. Additionally, if you receive an annual tax refund, those dollars could go straight into your emergency fund.
When to tap into your emergency fund:
Having a large sum of cash sitting in savings may seem wasteful to the adventurous soul. When emergencies seem unlikely, it could be tempting to use the money for vacations or down payments on your next big investment. However, draining this fund could leave you scrambling in the long run. Here are some acceptable times to pull from an emergency fund:
- Medical emergencies. Illnesses and accidents can cause medical expenses to go from an ordinary monthly cost to a large chunk of debt.
- Home repairs. If a major mechanical component fails, like your hot water heater, furnace, or refrigerator, you’ll be on the hook for a big-ticket repair or a new appliance altogether.
- Company layoffs and job loss. Sometimes your normal stream of income can stop unexpectedly. And with constantly changing markets, finding a new position quickly is never a guarantee. The standard recommendation is to have six months of income set aside just in case, but even a month or two is a great start.
- Unexpected travel and relocation. New career opportunities can be exciting, but often come with a relocation stipulation. Moving cross country may require finding someone to sublet your apartment or selling a home if you own one. Either of these situations would be difficult to do quickly so you may need to cover dual mortgages for a period of time or pay fees associated with the early termination of a lease. Additionally, a sick family member or the loss of a loved one can lead to last minute travel plans and the cost for tickets and even hotels can be more expensive when purchased on short notice.
With all these tips in mind, remember to prioritize how saving for emergencies fits into the grand scheme of things. Emergency funds are intended to be a saving grace. It is important to stay on top of normal payments, and you should continue saving for life events, like buying a new home, planning a wedding or moving across country may require finding or growing your family. Cover your planned expenditures and use your windfalls for emergency funding. A financial cushion gives you peace of mind and knowing you are prepared for the unexpected should be empowering!