Unexpected events are some of the only events we can expect.
How do you expect the unexpected? You need a plan.
It’s important to be prepared. Financially, there is one major step to take that can leave you feeling secure.
An emergency fund.
An emergency fund is the most important foundation of your financial health. No matter where you are in your financial journey, having an emergency fund will get you closer to your goals and limit your setbacks.
Using a credit card for emergencies can turn an emergency into a catastrophe. Getting into credit card debt will just create more problems, that’s why we plan for emergencies without credit cards, right?
Let’s Start With the Basics
An emergency fund is simple. It is a fund that you only use for real emergencies.
Your emergency fund should be kept in a safe account, not an investment account.
A Money Market account or a regular savings account would suffice.
Remember, when you open an account like this, you will usually be penalized for making more than a certain amount of withdrawals in a year, but that’s okay, since this account is only for actual emergencies.
The withdrawal penalty can help remind you not to take money out for non-emergencies.
You should begin with $1000. Get the account to $1000 as quickly as possible, because that is your bare minimum.
Once all of your debt is paid off, other than your house, you can begin to “fully fund” your emergency fund.
A fully funded emergency fund should be 3-6 months of living expenses.
It’s important to think about your current living expenses and then think about what your living expenses would be if you were to encounter a serious emergency, such as losing your job.
If you spend $600/month on food, it’s safe to say you would spend considerably less if you lost your job.
Take that into consideration and figure out the bare minimum you need, per month, to live on. Then multiply that number by at least 3, but preferably 6 or even longer, it’s up to you.
It’s also important to only keep the bare minimum you need because that money could be earning much more interest elsewhere, but feel free to add as much money as you feel comfortable with.
The Beauty of It
The best thing about an emergency fund is that once you have the the fund, you have far less emergencies. Life seems to throw big emergencies at us when we can’t afford them, but not so much when we can.
The feeling of security alone is enough to make the fund worthwhile.
This is an extremely important step in the foundation of your financial future.
Get started on building your emergency fund today, even if you are only starting with a few dollars.
Continue: DEBT – Dump Your Debt
Photo Credit: Cornell University Library