Emergency Fund: The Basics
There are a lot of uncertainties affecting the market these days. In a recent article, I discussed the new tax bill and some of the changes it will bring to the middle class. There are also changes coming to the healthcare system and other parts of our lives.
All of these changes require you to be more financially prepared. Having an emergency fund can really help you navigate through tougher times and deal with financial emergencies without a problem. If you want to set up an emergency fund for yourself, here are the basics you need to know.
Create a Separate Account
Always separate your emergency fund from the rest of your personal finance. You want to set up a separate bank account for storing the emergency fund. You can then store the ATM card for that account at home instead of having it with you at all times; this will also help with avoiding the temptation to use the money for something other than emergencies.
Consider using a money market account for the higher interest rate. Emergency funds usually sits in an account for quite some time, so having that extra interest is a great thing. Besides, money market rates are easy to understand, so you can find an account to use without spending a lot of time on the search.
Set a Goal and Plan Ahead
Saving is never easy; I know, because I too make impulsive purchases every now and then. Again, there are several things you can do to help speed things up. First of all, set up an emergency savings goal to reach. This is usually done by taking your monthly expenses and multiplying the total by the number of months you want to be able to survive without income.
For me, the magic number is now 12 – meaning I want to be able to survive for a full year without an income – but you can start with 3 or 6 months to make the goal more achievable. As you reach the first milestone, you can revise your emergency savings goal and aim for a higher amount.
Once you know exactly the amount to reach, it is time to figure out ways to achieve that goal. You can review your expenses and find ways to save more for the emergency fund. You can also search for extra sources of income in order to achieve the goal even sooner.
The one tip that you absolutely need to know, however, is to always put money into the emergency savings before you spend it on anything else. Instead of waiting until the end of the month and saving whatever is left, allocate a portion of your income and place the fund in your emergency savings right away.
Once the money is in the account, forget about it. Don’t even think about using the emergency fund for filling financial gaps before the next paycheck. You have to be willing to put in the time and energy into managing your personal finance better. That way you will be able to develop a sufficient emergency fund and be ready for anything.