Building an emergency fund.
Ready or not emergencies are going to happen so why not get prepared by building an emergency fund. Now you may be saying to yourself well that sounds great but what is an emergency fund?
An emergency fund is really just a savings account with a very specific role to be there for you when a financial emergency pops up and I’m talking about real financial emergencies.
Not my flight to Hawaii, it was a little more expensive than I expected it to be. A vacation is a great example of what not to use an emergency fund for.
So then what is this money for? The biggest task that this account has, is to pick up the slack in the event that you were to lose all or part of your income. So in the event that you're, for example, laid off or have your hours cut, the last thing you really want to do is worry about how you're going to pay your rent or your mortgage next month.
An emergency fund provides a buffer to prevent you from relying on things like credit cards and their high interest rates to carry you through these difficult financial times and you know not all emergencies are as large as losing your job.
Your emergency fund can also help out in the event of unexpected home or car repairs or maybe even a surprisingly large medical bill to make sure that these funds are there for you when you absolutely need them. I suggest opening up a separate savings account where you deposit the money just for these situations, now your next question is probably; how much money should I keep in my emergency fund? It's generally accepted that an emergency fund should hold at least six months of your necessary expenses. This would include things like your rent or mortgage, auto payments, insurance, food, and utilities.
I want you to just think of the bills that you would have to pay regardless of what's going on. So we'll use an example of if your necessary expenses are let's say four thousand dollars a month, you would need twenty four thousand dollars saved and I mean trust me i know that is a very big number but I don't want you to feel like you have to save all of this by the end of the year. It's definitely going to take time and that's fine, just add a line item to your budget and call it something like emergency fund and then just start saving a set amount.
Each month if you get a tax refund add that to your emergency fund, get a bonus at work, just go ahead and throw that into your emergency fund. It's going to take you a few years to build this up but you'll be so happy that you have this money sitting there waiting for you for not if but when an emergency pops up.