Financial obligations are a key priority in any household. However, due to any number of reasons from unemployment, unplanned medical expenses, or a natural disaster, financial emergencies are inevitable. The question is: how prepared are you to face such an emergency?
How to Start an Emergency Fund
An unexpected emergency can throw your finances under the bus instantly and make getting rid of debt even more difficult. Therefore, building a fund to face such situations should also be a financial priority. Having a cushion to fall back on in your deepest moments helps you ease the financial stress out of the equation.
How Much Should I Save?
This may vary depending on your financial standing and the economic conditions. The general norm for an emergency fund is to have at least a 6 month coverage on your living expenses. These expenses include bills such as mortgage, car payment, food, utilities and credit card payments (at least the minimum payments). You can use the emergency fund calculator from ACCC to get a head start.
How Should I Save It?
First, you need to remember that any money you can save is better than none. The easiest way is to automatically transfer 5-10% of every paycheck directly into your savings account. What you don’t ever see, you won’t ever miss. On top of that, try to cut back on unnecessary expenditures.
- Try to pack your lunch or make coffee instead of buying it. If you know you usually spend $30 per week on lunch and coffee, you can now transfer that money into your savings account.
- Use any talent or passions that you can as a side gig. Use the money you receive from cleaning houses, babysitting, tutoring, dog walking, blogging, and so on to build your emergency fund.
- Spring clean your garage, attic, and closets for a yard sale. You can also sell your stuff online.
Essentially, any extra cash outside your regular income can go into your emergency fund.
Where Should I Save It?
One you have decided how much money you need and how you can save it, it is important to save it in an account that is not easily accessible and earns some interest.
- Online banks such as Ally and Capital One 360 are a good example of an account that is not easily accessible. They also offer slightly higher interest rates than traditional brick and mortar banks.
- If you would prefer a brick and mortar bank, you can open a savings account. Make sure that it is not your everyday bank and does not link to any of your accounts. The separation from your normal bank can help prevent withdrawals from your emergency fund.
- Lastly, you might want to look into no-penalty certificate of deposit (CD). Regular CD’s are set up to hold money for a certain amount of time. If you pull the cash out before the designated time period is up, you could pay a lot of money in penalties. This makes a regular CD a bad option for an emergency fund. However, no-penalty CD’s offer better-than-average interest rates and don’t penalize for withdrawing money early. Be sure you read the fine print, so you know what “no penalty” means.
If you are having trouble saving because of excessive debt, call American Consumer Credit Counseling today at 800-769-3571. A certified credit advisor will help you evaluate your current financial situation and provide you with personalized debt solutions based on your goals.