You live in a hurricane-prone area, so you have a plan for what to do in case a hurricane hits. You may have never had a fire, but we hope that you have a fire extinguisher and an evacuation plan. You don’t plan to get in an accident when you go for a drive, but you still wear a seat belt and maintain insurance. Yet despite all the precautions you take in other areas of your life, you might not have a plan for when a financial emergency strikes.
Anything can happen. You can suddenly be laid off from your job. You can get in an accident and be out of work for months while you recover. You can find out that you have a serious illness, requiring time off from work and steep medical bills. Without a financial emergency fund, you may find yourself selling off the things you need, like your car or even your house. You’ll definitely find yourself at the mercy of your creditors. You might be able to get unsecured personal loans to help you through the emergency, but you’ll also need an emergency fund to help you weather the storm.
How Much You Need in the Fund
Any money that you have saved will be helpful in a financial emergency. But if you want to plan a true emergency fund and not just coincidentally end up with a little extra cash, you need to do some calculations. Typically, financial advisors suggest that you have at least six months’ worth of expenses set aside in your emergency fund. That means that if your monthly bills are $4,000, you’ll need about $24,000 in your emergency fund.
Take a hard look at your monthly expenses. You may not need to include everything that you are actually paying for right now. For example, if you were in a true financial emergency, you would likely cut back on your Netflix and your monthly facials. Plan your fund around your core expenses plus a little cushion. You don’t need to save for all the luxuries you indulge in now, but you will want to have some flexibility, even if you are facing hardship.
Tips for Building the Fund
Savings should already be a part of your monthly budget, but if it’s not, now is the time to start including it. Ideally, you should be saving about 10 percent of your post-tax income. However, if you can’t afford that, you should look closely at your budget to determine a percentage that you can spare each month and then include it in your savings plan.
Don’t forget to add in any extra money that you are likely to get throughout the year. While you are still building your emergency fund, you should consider adding tax refunds, work bonuses, cash gifts, and profits from selling personal items to your fund. Once your fund is established, you can use these extra funds for things like vacations or other fun stuff. If you can’t stand the idea of giving up all that extra money to your emergency fund, at least half it. You can buy something fun with the money and put some of it toward your emergency savings.
What happens if you have a financial emergency while you are still building your fund? You need to have some contingencies in your back pocket in case that happens. Getting an unsecured loan is a great option. You don’t have to worry about your credit, and you don’t have to put any items up for collateral. You might also consider drawing on your home’s equity or dipping into investment accounts if push comes to shove. Relatives can also be a great resource if they have the means and you have a solid relationship.
A financial setback can happen to anyone. You might think that you are protected because you have a great job, but anything can happen and the only control you have is how you respond to it. Creating an emergency fund can help you get through hardships caused by illness, injury, or job losses. You should have a healthy financial fund to support you in those unexpected times of need, just like we hope you have a retirement fund and a good insurance plan.