There is a lot of financial advice out there that a lot of people just seem to ignore. Maybe they just don’t feel like the advice is important or worth the trouble. Maybe they agree that it’s good advice, but they don’t feel that they’re in a financial position to follow it. One such piece of financial advice is having an emergency fund.
What is an Emergency Fund?
The concept of an emergency fund is really simple: set aside some money in a savings account to cover unexpected financial emergencies. Think of an emergency fund as a personal insurance policy. It protects you from the unexpected.
Why Do I Need One?
Financial emergencies are going to happen. No one is immune. If you have pets, they will undoubtedly have an expensive vet bill at some point. If you have children, they will either break a bone, need braces, or any one of a million things that can happen with kids. If you have a car, it will break down and need repair. You could get sick and miss several weeks of work. You could get laid off and spend several months unemployed before finding another job. The list goes on and on.
Without an emergency fund, you are forced to handle these emergencies on your own with your regular monthly cash-flow. And if your cash-flow is already pretty tight, an emergency like I mentioned above can easily send you over the edge. You may have to put a car repair bill on your credit card and carry the balance or get a payday loan for quick cash to cover a large expense.
How Much Do I Need?
The “experts” commonly say that a two income family should have 3 to 6 months of expenses saved in an emergency fund, and that a single income family should have 6 to 12 months of expenses saved.
I know what you’re thinking. How on earth am I supposed to save that much money when it’s hard to get by now. Don’t get too hung up on the actual amount. The important thing is simply to get some money set aside, even if it’s only $250, $500, or $1,000. While it’s true that a $250 emergency fund isn’t going to cover the full cost of many emergency bills, it will at least be $250 less that you’ll have to put on a credit card.
How Do I Get Started?
One easy way of starting your emergency fund is by using your tax refund (if you are receiving one). Simply move that money to a savings account when the check or direct deposit comes in.
Another way is to sell some unused items laying around in your house or apartment. You can list items online at eBay or craigslist, or have a yard sale. Put all the proceeds in a savings account, and you have the beginnings if an emergency fund.
Finally, set up an automatic transfer to a savings account from every paycheck. If you aren’t sure how to this, ask the payroll department at work or ask your bank/credit union. It’s really simple to do, and once you set it up you’re done. This will make saving automatic. If you get paid biweekly, a $250 emergency fund comes out to just under $10 per paycheck, a $500 emergency fund would be $19 a paycheck, and a $1,000 emergency fund would be $38 a paycheck.
Then you can sleep a little bit better at night, knowing that if an unexpected financial expense comes up tomorrow, you’ll be able to handle it.