Establishing an emergency fund is one of the first things you should do when striving for financial stability. The importance of an emergency fund simply can’t be overstated. It’s one of the things our debt counselors emphasize the most to consumers. The general rule of thumb is to have an emergency savings equal to 6-9 months’ worth of living expenses.
If an emergency fund does one thing, it gives you peace of mind. Unexpected financial burdens can hit you when you least expect it. Maybe you suddenly need to repair the bakes on your car, you need to buy a last minute plane ticket to visit a sick grandparent, or maybe you need to cover your living expenses while you look for a new job. The importance of an emergency fund is that it helps keep you steady in hard times. Whatever the emergency may be, having an emergency fund to fall back on will help you to stay financially afloat while everything around you may seem to be sinking.
How do I know how much to save?
Simply put, you need to calculate how much you spend every month. A good way to do this is to go over the past three months of bills and get a monthly average of your expenses. Expenses that should be included are:
- Mortgage or Rent Payments
- Insurance Premiums
- Car Expenses including gas and loan payments
- Discretionary Spending
It’s important to be realistic, especially when it comes to discretionary expenses. Although it may be easy to cut back on dinners out or trips to the mall, cutting your “fun” spending completely will most likely not be possible.
Where should I save it?
One you have decided how much money you need, our credit counseling advice is to save it in an account that is not easily accessible and earns a decent amount of interest. It’s important to research different places.
How do I build my emergency savings?
First, you need to remember that any money you can save is better than none. The easiest way to grow your account is to automatically transfer 5-10% of every paycheck directly into your savings account. What you don’t ever see, you won’t ever miss. On top of that, try to cut back on unnecessary expenditures. Maybe you pack your lunch or make coffee instead of buying it. If you know you usually spend $30/week on lunches and coffee, you can now transfer that money into your savings account.
What do I do once I’ve reached my goal?
Congratulations. Now pat yourself on the back and don’t touch the money unless there is an emergency. Revisit your emergency fund once a year and consider whether or not you should up the account. Take life events like a new baby, new house, or higher (or lower) salary into consideration when making the decision.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.