Some call it a “rainy day fund”, some call it the mayonnaise jar on the fridge, but however you say it, saving sufficient money for an emergency financial situation is something everyone should do. It’s a situation that nobody wants to face—may it be an emergency house or car repairs, a sudden sickness or health ailment, or the loss of a job—most Americans are not prepared to face a $500 financial emergency, as recently reported by the Star Tribune. For some individuals, $500 could cover rent for a month while for some families, $500 may only cover two weeks’ worth of groceries.
Think you’ve got a pretty good nest egg saved up? Experts say an adequate emergency fund should able to cover every expense for at least six months. Take a look at how you should plan for an emergency savings fund:
Take a look at priorities. In the event of an emergency financial situation, your expenses should cover the following:
- Housing expenses: Rent, mortgage, utilities, insurance.
- Food: Groceries, school lunches.
- Healthcare: Medical and dental insurance.
- Debt: Credit card, loan payments.
- Transportation: Car payments, loans, insurance, gas, and maintenance.
- Personal Expenses: Grooming, memberships, entertainment. (These can seem secondary in nature of important expenses to prioritize, but these extra expenses do occur and add up fast, so plan adequately).
Meet with a financial advisor. A professional financial advisor can help you address your finances and help you better understand how you can improve. They can help you formulate the best plan with your earnings, lifestyle, and priorities in order to reach your savings goal. They can help you plan for a short-term and a long-term emergency fund. Emergency savings funds need to be liquid, accessible and low-risk. A financial planner can help you create the best storage plan for you to save smartly and be able to access immediately.
Make a budget. Once you have a list of essential expenses, prioritize the important and create a budget. Commit to a savings plan and devote a percentage of every single paycheck to savings. Consider making those payments to an emergency savings fund an automatic deduction from your paycheck. An automatic deduction will promote steady savings and you won’t be tempted to place that money elsewhere.
Build your savings. In addition to a percentage of your monthly income, consider how else you can contribute to an emergency account. Do you have unused goods to sell? Can you afford to take a second job or find an extra income opportunity? Take a look at what you can cut from your budget. Turn the thermostat down by a few degrees. Cancel memberships and services that you don’t use or don’t benefit from. Cook more meals and entertain more often at home. These small and minor lifestyle changes can make a significant change in your finances.
Stay on top of your payments. It may be easy enough to say, but it is important to understand the concept of living within your means. Look for ways to tighten your wallet, prevent overspending, and build regular savings. Prevent yourself from charging your expenses so that your credit score doesn’t plummet as you face an emergency financial hardship. Consider continuing these habits when you are no longer in financial hardship. Committing to regular and healthy savings habits can be a lifestyle change for some, but your finances will thank you for it!