What is an emergency fund? An emergency fund is money set aside for when life happens and things go wrong. Murphy’s law states that “anything that can go wrong will go wrong.” You know it’s going to rain. So it’s important to be prepared. Having the proper gear such as an umbrella or a rain coat can help you in the event of storm. An emergency fund is like an umbrella or rain coat for your finances.
Ask yourself this question. If you have a $400 emergency come up today how would you pay for it?
According an article in June 2015 from the Washington Post, a 2014 survey by the Federal Reserve found that 47% of Americans would sell something or borrow money in the event of a $400 emergency. Those making less than $40,000 a year were found to be the most likely to have a problem an unexpected $400 expense. Surprisingly, over a quarter of people interviewed who made more than $100,000 said they would have the same problem with an unexpected $400 expense.
Is this really the best way to handle your finances?
4 Reasons Why Everyone Should Have an Emergency Fund.
1. To Be Prepared for the Unexpected
Emergencies can and will happen in life. That is a guarantee. Some examples of unexpected emergencies can include a job loss, your hours are cut at work, car expenses like a transmission going out, expenses related to an illness, home repairs, an unplanned pregnancy, unanticipated travel, moving expenses, or an unexpected death in the family. An emergency fund is a great tool in reducing stress in your finances.
2. To Cover Expenses
An emergency fund is designed to cover expenses, not to replace income. An emergency fund is like a safety net in times of need. If you lose your job you would need to cut your expenses and minimalize your lifestyle until you found work again. By cutting expenses your emergency fund can actually last longer, since you won’t be spending money on luxuries until your cash flow is stable with a new job. Bills such as rent, mortgage, utilities, food, gas, etc. still need to be paid.
3. To Reduce Stress and Provide Easy Access to Cash
Emergencies are typically stressful enough as it is. Having an emergency fund will give you peace of mind. You want to have your emergency fund in an account that gives you easy access in the event of an emergency. If you lose your job or have unexpected expenses for car repairs you want the money available to pay bills.
4. To Avoid Paying interest.
By charging an expense on a credit card you would likely be paying 15-30% interest. Using a debt repayment calculator with Credit Karma I found that it would take 42 months to pay back $400 at 27% interest with a typical minimum payment of $15 a month. This would result in paying $412 towards the principle and $218 towards interest.
The $400 emergency would cost you $630 in this example!
Save up $1000 as quickly as possible and call this your starter emergency fund. If you make less than $20,000 a year your goal is $500 for your starter emergency fund.
Your goal should be eventually to have at least 3 to 6 months of expenses in your emergency fund. Depending on your job situation it may be better to have 6 to 12 months of an emergency fund.
1. Create a Savings Account at your bank for your emergency fund.
2. Set up a direct deposit for money to be transferred every month into your emergency fund.
Are you ready to start or work on completing your own emergency fund?