Our life is full of surprises and it is often hard to cope with them, both emotionally and financially. Such unexpectancies are not necessarily negative – this may be either a positive pregnancy test, or a spontaneous decision to set out on a long-term journey, or even a luxurious wedding. In a worse scenario, you may need resources to live on for at least three month if you lose a job, for instance. Other common situations when an emergency fund would come very useful are unexpected dental emergency or a car breakdown. Finally, it may happen you will need to urgently move to a different house, which is expensive as well.
There are many startling things in life that cannot be avoided. And still, there is an opportunity to avoid personal financial crisis if to start preparing in advance. That’s exactly what makes emergency fund a must-have option.
The first step in the preparation process is to establish a solid emergency fund. How big should your emergency fund be is a good question. The answer depends on a variety of factors, although the basic one is your family status. Ideally, your emergency fund should be about half a year of your income if you are single. In case you are a parent, it is better to increase your emergency fund to a year of your income.
Of course, it is impossible to store up such a sum of money in a short run, which is why you will have to start small. Emergency fund of one to two thousand dollars would be enough for a start. Even though it won’t play a big role if you face substantial expenses, it will help you develop a habit of putting money aside. Your next step is to build an emergency fund that would cover three and eventually six months of your income. This would be a more or less solid beginning. However, even if you are single and don’t have children, consider to have more substantial emergency fund if lay-offs are common in a field you work in.
There are many ways to help you build your emergency fund. The first thing you should do is to decide where to keep it. There is a couple of options, although the simplest-to-use one is to open a savings account. If you do not have the one, you will need to make a small research. Try to find an account with the highest yielding interest that doesn’t penalize you for early withdrawals. Remember that the key idea of having an emergency plan is the ability to easily access it at any moment.
Once you have a savings account, try to turn making regular payments into a painless habit. To begin with, ask you bank to make automatic transfers of a specific amount of money on a specific day. Even if you cannot afford more than $15 a week, still do it. The most important thing is regularity.
Work hard to reduce your spending habits. You may actually save a fortune if you cut your food costs and refuse from impulse buying. Afterwards, think carefully – maybe it is time to increase your payment amount to $20 per week?
Finally, if you want to speed up the process, you could consider working overtime (at least until you build an emergency fund for at least three months). You could either ask your employer for an additional project or find some freelance work. A good option would also be to find a side hustle or master some financial mechanism Glenmore Investments. In any case, the choice depends on your skills and time resources.
In addition to a solid emergency fund, it is very important to have an adequate insurance to secure your family’s future. This will not only help your family cope with all types of unexpected expenses, but will also give you peace of mind. Life insurance, in particular, is literally vital if you have children. For obvious reasons, home insurance coverage is important as well, just like health insurance. Medical emergencies, in fact, are one of the most common reasons why you may need an emergency fund. Although all of this will increase your monthly expenses, it may save your family a fortune one day.
In such a way, it is better to establish an emergency fund as soon as possible. On the one hand, this will let you sleep with a peaceful mind. On the other hand, if one day you face a crisis situation and unexpected financial expenses, an emergency fund will allow you to concentrate on taking care of the problem instead of searching for finances. The sooner you start building an emergency fund, the sooner you will get confidence that you can cope with any life surprises without worrying about financial issues.