Unexpected expenses are bound to happen in life. Financial setbacks can occur in the form of an unexpected car or house repair, medical bills, or even unemployment, to name a few.
Having money set aside in case of an emergency will help you face rainy days when they come. However, according to the latest “Report on the Economic Well-Being of U.S. Households” by the Federal Reserve Bank, 39 percent of adults in the U.S. do not have enough cash to face an unplanned 400 dollar expense.
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When my twins were six months old, my family had to temporarily move out of our home due to extensive water damage. The damage occurred after the fridge water line leaked. The water destroyed the floor on the main level and spread down to the basement. The house needed significant work to get back to its original state, and our family unexpectedly had to move to temporary housing for seven weeks while work was getting done at our house. Though the insurance company covered the majority of the expenses, we also incurred significant unplanned out-of-pocket expenses to face the emergency. Having the money set aside provided great relief to an already stressful situation.
We could not have predicted that this event would happen. That is why your emergency fund must be readily available, whether in a high-yield savings account or a money market account. When you have funds available, you do not have to go into debt to face unexpected expenses.
While an emergency fund might not solve all your financial problems, it provides a safety net in case of a financial storm.
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How much should you save?
Determining how much to save in your emergency fund depends on your specific circumstances. But, a good rule of thumb is to have between 3 to 8 months of living expenses available in case of emergency. While people like Dave Ramsey believe in having three to six months of expenses, Suze Orman encourages people to have eight months to a year of emergency saving. Given the current economic outlook and uncertainty, aiming for a more sizable emergency fund is wise.
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How do you get started?
It can be overwhelming to think that you should set aside such a large amount of money for emergencies. That is why starting with a small emergency fund of $1,000 is a significant first step, especially if you are paying off debt. Once you have the first thousand dollars saved up, saving another thousand dollars should be your next goal. Then you can aim to save a full month of expenses and keep going until you reach your target. Building a six-month emergency fund is a process that takes two years for the average person.
How and where to keep your emergency fund?
Some people struggle with building their emergency funds because they get tempted to spend money when they easily access it.
A great way to leave your emergency fund intact is to separate it from your regular account(s). You can open an account at a different bank for your emergency fund or open a separate account at your current bank. If the account has online banking, naming it “Emergency Fund” to remind yourself that the money is only for rainy days can help. Setting up an automatic monthly transfer from your checking account to your savings account will guarantee that you continue to work towards the goal without thinking about it.
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Having an emergency fund is a significant first step toward financial security. When emergencies happen, having money available in cash equivalents can save you from going into debt and having unnecessary stress. When you use your rainy day fund to face financial emergencies, it is important to remember to replenish the emergency fund to be prepared for the next unexpected expense.
“Every financial worry you want to banish and financial dream you want to achieve comes from taking tiny steps today that put you on a path toward your goals.”