An emergency fund turns a crisis into an inconvenience. -Dave Ramsey
dfhgfhhgfhdhdhfdhdhdhddh
According to Wikipedia: An emergency fund, also known as a contingency fund, is a personal budget set aside as a financial safety net for future mishaps or unexpected expenses.
Whether it’s called an emergency fund, contingency fund, or a rainy day fund; is a special fund for unexpected expenses necessary? For the vast majority of people, the short answer is a resounding yes.
An Emergency fund consists of money set aside to be used in dire need. But, does anyone know beforehand when they’ll be in dire need? Most people go about the business of daily living without really thinking about or anticipating a catastrophic event because those types of events happen only to other people.
But on any given day a person is one fall away from a serious back injury, broken hip, or serious laceration. Consider a driver who runs a red light and crashes into your vehicle. That situation could entail both physical and property damage. Someone walks into work on any day and is faced with a “Pink Slip” and the prospect of no job shortly. The heating/cooling system, refrigerator, or washer/dryer in a home needs to be suddenly replaced.
None of these particular situations are life-threatening, but all can leave your finances in shock and disarray.
hdhfhghgfghfhf
What does “dire need” really entail?
According to a January 19, 2022 survey by Bankrate only about 4 in 10 Americans have enough savings to cover an unplanned expense of $1,000, meaning more than half would need to find other means to pay for an unexpected car repair or emergency room visit.
The dire need would include:
- Medical or dental emergencies- unexpected illness, accident, or emergency room visits could generate large unanticipated expenses.
- Automobile accidents- auto accidents generate the potential for large personal and auto damage expenses.
- Loss of income- job loss is one of the major touch points. Along with accidents, unanticipated job loss will require access to emergency funds until more long-term income needs can be addressed.
- Unexpected home repairs- living on the Gulf Coast is a constant reminder that hurricane deductibles are an ever-present threat. Lightning, tornadoes, earthquakes, and other natural disasters will create the need for emergency funding. Aging homes require periodic maintenance that sometimes sneaks up on homeowners and presents itself at an inopportune time.
- The unexpected death of an immediate family member or spouse.
- Unplanned travel expenses or family expenses due to the death or illness of an extended family member.
- Any other unplanned or emergency expense.
fhfhfhfhfhfhfhfh
How much to save for an emergency fund?
The usual amount of money needed for an emergency fund is $1000.00 or six months of income, whichever is greater. (For some people, unfortunately, a flat tire would qualify as a dire need, and for those individuals, $1000.00 is an unreasonable amount. Even $500.00 may be unreachable in the short term.)
dhfhfhfhfhfjfjf
So, what is an appropriate amount of money for an emergency fund?
If someone is pressed for cash, then $100.00 is a starting point. (At this level it had better be a small emergency, but $100.00 will ease a little pain.) That amount should be gradually increased to $1000.00 or six months of income. A small amount saved each week will become a moderate emergency fund over time.
Not taking the time and effort to build an emergency fund can be a catastrophic problem in a worst-case scenario. (Even someone with adequate emergency funds can be financially stretched in certain situations.)
But, having emergency funds is better in every situation than not having emergency funds. Individuals and families with no emergency savings must use regular income in an emergency and will struggle to recover from that emergency while having fewer savings for any additional financial shocks.
djdfjfhjfjfjdhdhd
What’s the easiest way to get started?
Saving a tax refund is probably the easiest way to start your emergency fund. It’s money that’s not normally budgeted and can be easily deposited into an emergency fund without taking money away from other fixed costs. If banking a tax refund is not possible then managing cash flow is the second-best plan. Using inherited money is also a great way to fund an emergency fund with unanticipated money.
For most people starting an emergency fund may require managing the current cash flow to reallocate money into an emergency fund. This makes an emergency fund seem painful because money is reallocated from ordinary spending and people feel like they are giving up “regular” money normally spent on other items.
fjfjfhjfhfjfjfj
How does one go about funding an emergency fund?
- Start making automatic deposits- automatic recurring withdrawals can painlessly grow an emergency fund.
- Consistent deposits- people will set aside a certain amount each day, week, month, or paycheck.
- Set a goal- start with the end in mind. Decide how much you need to save, and then divide that amount into weekly or monthly payments.
- Monitor progress- in the Blog and Podcast “HAVING A “PLAN”, monitoring progress was discussed. The best plan will not reach fruition if not monitored and modified to incorporate changing needs.
- Celebrate success- if the first four suggestions are followed, at some point the goal will be reached. Celebrate your success! Once into the habit of saving many individuals and families find that goals are met sooner than anticipated. A side benefit is that many individuals and families that are now in the habit of saving regularly will move on to tackle other debt and create other positive outcomes.
fjfdjdhjdhdhdjfhfjjdh
Where to keep your emergency fund?
An emergency fund by its very nature needs to be readily accessible because emergencies happen at the most inopportune times.
The most accessible places to keep emergency funds would include:
- Bank account- a bank checking, savings, or money market account.
- Credit union account- checking or savings account.
- Brokerage money market account- cash may not be available for one to three days unless a wire transfer is used.
- Cash kept at home- not the safest mode of saving. However, some people like the idea of having cash on hand and available at times when banks are closed.
hfhfghfgjfhf
Having an emergency fund:
- Creates peace of mind- having money tucked away for emergencies lowers stress and fosters peace of mind that emergencies can be handled with existing emergency funds.
- Discourages impulse spending- emergency funds in a dedicated account present a barrier to impulse spending. (As cookies tucked far to the back of the pantry, those dollars are “out of sight and out of mind.”)
- Creates a positive mindset- once an emergency fund is established, many people create additional savings accounts which reinforce the habit of saving.
- Prevents poor decisions during stressful periods- people without emergency funds are in a financially disadvantaged position and are at the mercy of aggressive and dishonest lenders.
- Creates the first step in an organized financial plan- most financial planners agree that establishing an emergency fund is one of the first steps in implementing an organized financial plan.
fjgfhfhfhfhfhf
Final Thoughts
- At some point, most people will have some type of emergency that requires quick access to cash.
- An emergency fund is a financial necessity for a majority of households.
- Traditionally, an emergency fund should equal the greater of $1000.00 or six months of income.
- Begin saving with the end in mind and save using an organized and consistent approach.
- An emergency fund creates peace of mind, prevents poor decisions under stress, creates a positive mindset, and helps with other aspects of financial planning.
- Hoping you have no emergency is not a good emergency plan!
- Funds must be readily available and accessible.
jfhghghghghgf
If you’d like to be a part of a free online retirement community, join us on Facebook:
COMMENTS