Preparing for Financial Emergencies
While many people, regardless of age, find saving money to be challenging, establishing good savings habits is a key part of achieving your financial goals. A solid savings strategy should include dollars earmarked for emergency expenses. Being prepared for unexpected expenses, which are bound to happen at some point in your life, may lessen the burden on your budget. In addition to setting aside a fund for financial surprises, your savings plan should also include allocations for short-term goals, like for vacations, middle-term goals for buying a home or vehicle, and more long-term goals such as retirement.
Just as your financial journey is unique, so is your definition of a financial emergency. In general, a financial emergency is any circumstance in which you can’t live your normal life unless you spend a significant amount of money to fix the situation. Examples might include: car repairs, health issues or a family member experiencing a loss of income and you needing to compensate for their lost wages. All these are financial “needs” which must be addressed.
While it may be easy to justify an expense as an ‘emergency’, buying the newest smart phone, taking a last-minute vacation or splurging on a new wardrobe are “wants” and, therefore, not usually financial emergencies.
Ask yourself: Is it unexpected? Is it necessary? Is it urgent?
If your answer to any or all these questions is yes and the cost is more than you have on hand or in accessible accounts, then it would be considered an emergency, and you can tap into your emergency fund.
The recommended amount for an emergency savings fund is the equivalent of three to six months of your typical living expenses. If you don’t have this amount set aside, don’t be discouraged! The key is getting started and over time build up to this amount. Try setting a goal of establishing a starter emergency fund of $400. Doing so will give you leg up on 40% of Americans, who say they can’t cover a $400 emergency expense!
Rent
Transportation
Utilities
Dependent Care
Groceries
Debt**
*Car Payment, Gas, Insurance, Bus Pass, Train Fare, etc.
** to at least cover the minimum payment due
If all of this adds up to $2,200, for example, then you’d need $6,600 to $13,200 in your emergency savings fund.
Building an emergency savings fund can take time and patience, especially if you are just starting out. But setting aside even $50 or a $100 a month and forming good financial habits can get you close to your emergency savings goal in a few short years. Here are a few tips that can help you fill that emergency savings bucket quickly.
- Make a budget and stick to it.
- Set a monthly emergency savings goal.
- Apply a portion of any raises or bonuses to your emergency savings fund.
- Evaluate your expenses, especially those that are on auto-pay plans, like subscriptions. You may find that your idea of needs and wants change over time. Apply any amount saved to your emergency fund.
- Consider temporary lifestyle adjustments. Attending happy hour with friends once a month instead of weekly, cutting back on your cleaning service or even picking up a part-time job temporarily are short term adjustments that can help you fill your emergency signs bucket.
Jump-start to Retirement Prep
Retirement may not even be on your radar, especially if you’re several years out from retirement age.