“Upon us all, a little rain must fall”
If there’s one thing we all have in common, it’s that things don’t always go as planned. No matter how well we prepare for the future, there will always come a time when we are faced with unforeseen difficulties.
It’s true that we don’t know exactly when we will come upon an emergency or what shape that emergency will take: a serious accident or illness, a big property loss (e.g. car theft or a house fire), a natural disaster, even losing your job at the worst possible time.
The reality is that, though we don’t like to think too much about these things (for obvious reasons), it is only by being prepared for them that we can manage to limit how much damage they do to ourselves and our loved ones.
Setting up—and maintaining—an emergency fund is an important part of being prepared for whatever might come your way. Some important things to consider when getting started with your emergency fund:
You’re not alone. If you don’t yet have an emergency fund, you aren’t the only one—according to Bankrate.com, 28% of Americans have no money set aside for emergencies. Another 20% have some money set aside, but only enough to cover three months or less of expenses.
So how much is enough? Obviously, the more money you have dedicated to dealing with emergencies when they arise, the better. But what should you think of as the minimum? For a long time, the rule of thumb was that an emergency fund should be able to cover all essentials for 3-6 months. With the economy still in pretty bad shape, many financial advisors are now recommending keeping handy nine months’ or a year’s worth of savings, in case your “rainy day” turns out to be more of a “rainy year.”
Trim the fat in your current budget. Taking a critical look at your monthly expenses now will help you with your emergency fund in two important ways. First, by figuring out which expenses are critical and which ones aren’t, you can come up with a more realistic (and less daunting) projection of how much money you should have saved up per month in your fund. Second, by spending more carefully now, you can take that money you would have spent on things you don’t really need and use it to grow your emergency fund instead.
Create a dedicated savings account. One of the most crucial steps in setting up your emergency fund is to keep it separate from other savings accounts. Many banks will allow their customers several separate accounts at no extra charge, especially if a minimum balance is maintained. This is important because while some of your other savings accounts might be drawn on for purchasing big-ticket items (That vacation to Maui! A new snowboard! Braces for the kids!), your emergency fund should be kept strictly for emergencies.
Here’s an easy test: if you find yourself wanting to dip into your emergency fund for something and you wonder “is this really an emergency?”…it isn’t. So hands off the fund. You’ll know a real emergency when you see it.
Savings account? What savings account? If you read the last item and said “wow, several savings accounts? I don’t even have one savings account!” then first thing is first: GO GET A SAVINGS ACCOUNT.
I’m sorry for yelling. But seriously, I can’t stress this enough. You. Need. A. Savings. Account.
Enroll in an automatic saving program. As we’ve talked about here before, constantly deciding to set money aside in a savings account is a very hard thing to do. You can lighten that load substantially by enrolling in an automatic savings program. For example, most banks will set up regular automatic transfers from your checking to your savings account (i.e. once a month), and our SavedPlus app also does this while giving you even more flexibility, by letting you save a specific percentage of what you spend on purchases.”. By automatically setting aside a little money every month, every week, or with every purchase, you will see your emergency fund grow quickly, without ever having to stress about growing it.
By following the above steps, you can make sure that you and your loved ones are as protected as possible from whatever surprises might come your way. You can never tell when a little rain is going to fall into your life. But by setting up and maintaining an emergency fund, you can make sure you’ve got a big enough umbrella.