Tips for Establishing Emergency Funds

Knowing where to start and when to spend

12/17/2013

In today’s unsteady economy, it is extremely important to have an emergency fund established. Having funds set aside can make a substantial difference in the case of events such as losing a job, dealing with unexpected medical issues, or paying for repairs to your home or car. If you don’t have an emergency fund set up, you may have questions about where to start; if you already have emergency funds set aside, you may be wondering if what you have is enough. Here are some tips to help along the way.
 
A recent study by Bankrate.com revealed that almost 50 percent of Americans haven’t saved enough money to cover three months of expenses should any unexpected emergency occur.  
 
According to Anna Schuman of Consumer Media Network (www.cmn.com), “Experts want consumers to have twice what fewer than half of Americans have saved—a minimum of six months’ expenses, but ideally nine months’ to a year’s worth.”  
 
Schuman goes on to offer some tips to keep in mind when establishing your own emergency fund:
 
Know your expenses and how much you may need in an emergency. Too much saved is better than too little saved, but making sure you have enough to get by in an unexpected situation is crucial. Consider the level of expenses you manage on a regular basis and how much you’d be comfortable spending in an emergency. Save at least that and work toward saving up to six or more months’ living expenses.
 

Begin with a smaller goal.

Thinking about trying to save six months’ worth of expenses might make your jaw drop, so start simple and small. Begin by setting aside $25 from each paycheck and slowly increase from there. As you continue to save, you’ll find it easier to keep adding.
 

Make cuts where possible.

If you find that saving even an extra $25 or $50 per paycheck is financially painful, consider taking money from your discretionary daily spending and using that for savings instead; if you receive extra money here and there, avoid the urge to go on a shopping spree and instead add that to your emergency fund as well.
 
If you’re one of the many Americans who don’t have an emergency fund set up yet, you’re not alone. Greg McBride of Bankrate.com notes that in today’s economy many more people are starting to realize the importance of saving. To help you get started, McBride presents some thoughts to consider:
  • Make saving an automatic habit. Take advantage of direct deposit and have money automatically transferred to a savings account. You won’t miss what you don’t see.
  • Open a high-yielding savings account. Do your research and opt for an account with higher interest rates, but make sure those savings are liquid—meaning you can access them when necessary.
  • Track your monthly spending. Monitoring your spending on a regular basis can flag areas where you can cut back and will help to maximize your savings.
  • Pay down any high-interest debt. This may sound counterproductive to saving money, but paying down your debt as soon as possible will open up interest-free funds for other purposes.
  • Consider refinancing your home. With mortgage rates at a historic low, refinancing your home can help you acquire a better interest rate on your home while also cutting down your monthly mortgage payments by hundreds of dollars, which you can then use to build your emergency fund.
It is extremely important when building your emergency fund to define what an emergency really is. It shouldn’t include buying a new car or taking a spontaneous vacation to Bermuda or remodeling a room in your home. An emergency fund should be for events that could otherwise cripple you financially, like a tree falling on your garage, your son breaking his ankle or your getting laid off.  
 

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