How's Your Emergency Fund? How to Prepare for the Unexpected
Life is full of surprises. Although we wish they were all happy surprises, sometimes they are not. Cars break down. Companies lay people off. Houses need fixing up. The list goes on and on for unexpected surprise bills. Being ready for those unplanned surprises from a financial standpoint makes them much less stressful to deal with. This is where an Emergency Fund comes into place. An emergency fund serves as a financial cushion, providing you with funds to cover unexpected expenses such as medical emergencies, car repairs, or home repairs. It acts as a safety net, preventing you from relying on credit cards or going into debt when faced with unforeseen circumstances. Most people have heard of a rainy day or emergency fund, but they aren’t always easy to build. One in four people report not having any emergency savings at all! With these tips and tricks, let’s work to build one together!
1. Set a Realistic Savings Goal:
To start building your emergency fund, it's important to set a realistic savings goal. A good recommendation for your emergency fund goal is to aim for three to six months worth of savings. Begin by assessing your monthly expenses and determine how much you would need to cover your living expenses for that long. This will vary depending on your family size, lifestyle, and income. Have your monthly budget handy and prioritize the Needs over your Wants. Once you have the number you will need, aim to save a specific percentage of your income each month. Setting a timeline will help, but overall, simply making it a priority will keep you on track to build that nest egg.
2. Create a Budget and Track Your Expenses:
If you haven’t already, create a budget with your current spending habits to know where your money is currently going. You can’t make changes to your spending habits if you don’t understand where you are currently spending your money, right? Creating a budget is an essential step in saving for the future. Track your expenses meticulously and identify areas where you can cut back. Grouping items as either Needs or Wants will help you in figuring out which spending items to prioritize. Analyze your spending habits, eliminate unnecessary expenses, and redirect those funds towards your emergency fund. Need help setting up a budget? Check out How to Create a Family Budget: A Step-by-Step Guide to create your budget today!
3. Automate Your Savings:
Once you get a handle on which part of your income is needed for short term spending, you can isolate the surplus portion of your income that can help you achieve your savings goal. Make saving money a habit by automating your surplus into your emergency fund. Set up a separate account dedicated solely to your emergency fund and automatically transfer that surplus into the account before you even see it. Treating this transfer as a monthly bill will ensure that you consistently contribute to your savings without even thinking about it.
4. Cut Back on Non-Essential Expenses:
Take a closer look at your monthly expenses and identify areas where you can cut back. Are there little vices that you can temporarily cut out until you meet your Emergency Fund goal? Reduce discretionary spending such as eating out, entertainment, or subscription services. Once you reach your goal, you can reconsider what to do with that surplus in your income. It’s important to be committed to your goal, so be mindful of your spending and prioritize saving over non-essential purchases. Every dollar saved brings you closer to your emergency fund goal.
5. Generate Additional Income:
Perhaps it’s easier to find ways to bring in more money than to cut back on your current spending. That’s fine too! Consider finding ways to generate additional income to accelerate your emergency fund growth. Explore part-time job opportunities, freelancing, or monetizing a hobby. Check out 29 Flexible Part-Time Jobs to Make $4,000+ Per Month for some money making ideas to increase the money coming in. Increasing your income, even if it's a modest amount, can make a significant difference in building your emergency fund faster.
6. Save Windfalls and Extra Funds:
Sometimes those surprises life throws at you are actually pleasant and exciting! When unexpected funds come your way, resist the temptation to splurge. Instead, funnel those windfalls such as tax refunds, bonuses, or unexpected gifts into your emergency fund to bring your end goal to fruition faster. That instant gratification may be sweet in the moment, but nothing will feel as good as the peace of mind of having back-up money in case something goes wrong. These extra funds provide a fantastic opportunity to give your savings a boost.
7. Prioritize Debt Repayment:
If you have outstanding debts, it’s time to start paying those back. You already know what is your income surplus versus your minimum income needed to stay afloat, so use that knowledge to set up a repayment strategy for your debts. High-interest debts can hinder your progress in saving for the future. No one likes that sinking feeling debts have. Allocate a portion of your monthly budget to paying off debts while still contributing to your emergency fund. If possible, contribute to both the emergency fund and your debt balance. But, of course, find a balance that works best for your financial situation.
8. Reassess and Adjust Regularly:
Life circumstances change, and so should your savings strategy. Sometimes you may have a change to your income money coming in or the spending money needed for essentials, so your budget and planning needs to account for that. Regularly reassess your emergency fund goal, your budget, and your progress. Adjust your savings contributions and strategies as needed to ensure you stay on track and reach your target.
Building an emergency fund is an essential step towards financial security and peace of mind. By following these practical strategies and making saving a priority, you can create a solid financial safety net for yourself and your family when the unexpected happens. So many people put off saving for an emergency fund because they don’t think the money will ever be used. Although it may not be spent on items, at the very least, your emergency fund is buying you peace of mind.
