This post is part of a series on staying on top of your finances.
Now that you’ve automated your finances, it’s time to dig deep on one of the most important, yet unpredictable, aspects of personal finance.
Your emergency fund.
Because here’s the truth:
Many Americans will do well and have a better shot at staying on top of their finances and having more financial control, if there were no emergencies.
After all, you know your monthly income (after tax) and expenses.
And you can decide how much to put towards savings and retirement.
Except you don’t know how much of your monthly income will go towards emergencies.
Basically, emergencies are events of life that we didn’t expect.
- Job loss
- Health care emergencies
- Car expenses
- When a loved one passes
- Unexpected travel
- Household repairs
In this chapter, I’m going to show you EXACTLY how to prepare.
That way, when any of these financial emergencies hit, you’re better prepared without causing a huge damage to your financial stability.
Build up an Emergency Fund
Building up an emergency fund is not easy.
You’re trying to prepare for something that may/may not happen.
But, as they say, life is full of surprises. And you’ll think ‘stuff’ only happens to other people, until it happens to you.
Also, it’s better to have an emergency fund saved, and not need it… than to NEED funds for an emergency, and have no savings to pull from.
This is why I recommend that the first step to preparing for financial emergencies is to: build up an emergency fund.
Go on and create an “emergency fund” in your savings account
As soon as you get your paycheck, deduct the expenses for your essentials (note: not your luxuries)…
… I’m talking about essentials like rent or mortgage, food, transportation, debt payments, and retirement savings…
… Go on and put away some money into your emergency fund… every single month.
Your goal is to have an emergency fund equal to a year of your essential expenses saved up (Again, the more savings you have for emergencies, the better).
That is, if you spend $1250 a month on the core essentials I mentioned above, then you’d need to save towards an emergency fund of:
$1,250 x 12 months = $15,000
That might sound like a LOT of money. So you might be asking: “where will I get that sort of money?”
Start with memberships and subscriptions that you don’t use to their full capacity.
For example, if you pay for Netflix, Hulu, new handbags, and clothes before saving for your emergency fund, then you have the answer to your question.
Also, look at how much you pay for your wireless plan and see if you can negotiate a better deal, or switch to a more cost-effective carrier.
Here’s the simple answer to the question: “where will I get that sort of money?”
Start from what you currently earn now.
For example, you can save your bonus from work, commissions, gift from a friend or relative, and even tax refunds. These are sources of cash you didn’t plan to earn, but they will go a long way in boosting your emergency cash reserve.
Understand why you need to save for an emergency fund, and you’ll muster more courage to save every month… even though it might be uncomfortable.
40% of Americans will struggle to pay for an unexpected bill of $400, according to a 2018 study of 12,000 U.S. households done by the Federal Reserve.
The lack of an emergency fund might set someone back (in finances and in life goals) for years, because they have to go into debt to come up with several emergency expenses
Keep your emergency fund in a high-yield savings account such as the Capital One 360 Performance Savings Account with no monthly fees and no minimums to open or keep your account.
Insurance covers you from unexpected expenses; helping you offset the costs you’d spend if you had no insurance.
Here are some common types of insurance and who needs them the most:
- Health insurance. Everyone needs this, to offset the cost of expected and unexpected hospital or medical bills. Especially if you can’t afford the out-of-pocket costs
- Car insurance for drivers
- Life insurance for parents, or those with dependents
- Homeowners insurance for homeowners and landlords
Other types of insurance that you might need depending on your situation are: renters insurance, pet insurance, and travel insurance.