Most financial responsibilities are predictable, but you need rainy-day funds to deal with the unpredictable. Do you have enough?
Financial crises do arise, times when you must pay for something unexpectedly and immediately.
A medical emergency could keep you out of work. Your car could break down. Home repairs could become immediately necessary. In the meantime, all your regular bills are still due.
Think of an emergency fund as something you build, rather than something you have.
Circumstances such as these are not pleasant to consider, but they happen.
Are you prepared?
You can’t predict a crisis, but you can prepare for one. In terms of finances, that means having an emergency fund – easily accessible money set aside for unexpected costs – in place.
A retirement fund does not double as an emergency fund. Similarly, an emergency fund is not the same as a savings fund for a vacation, or a credit card.
Retirement, vacation savings, and credit are their own things. Emergencies are another. Set aside money for emergencies, and don’t spend that money on something else.
Think of an emergency fund as something you build, rather than something you have.
Begin by setting aside small amounts of money each week, ideally into a savings account of some kind.
Your bank likely will have the option of automatically transferring a set amount of money from your checking account into a savings account at a specified frequency. If you would rather handle the saving manually, stick some cash into a jar once a week, and deposit your stash into the account monthly.
But how much should you set aside? Since an emergency fund is something you build gradually, set yourself some incremental savings goals.
Bare Bones emergency fund: One paycheck
First, set aside an amount of money that is the equivalent of one paycheck. You likely know off the top of your head how much money you make biweekly, monthly, or however frequently you get paid.
If your paychecks vary greatly from month to month, as they likely do if you are self-employed or paid by commission, then calculate the average amount of your paychecks over six months. Decide how quickly you want to have that amount of money saved.
Next, calculate how much money you must save per week to meet that goal. If your monthly wage is, say, $3,000, and you want to save that amount in a year, then each week for fifty-two weeks you must put aside fifty-eight dollars in an emergency fund.
Good: Three months of expenses
To reach the next level of savings, you must figure out how much money you need to meet your monthly expenses.
If you are not good at creating spreadsheets from scratch, find a ready-made spreadsheet. For example, you can use one of the free budget templates from Microsoft Office.
Decide how quickly you want to save this amount, and using that goal, calculate how much you need to save weekly.
Better: Six months of expenses
A single person with a stable income may be content with three months of savings. Some people, however, ought to plump up the emergency fund more. For example, people with families have others to think about.
Likewise, people who work in volatile job sectors or who are self-employed may need more of a cushion because crises could be more likely to occur.
Six months’ worth of expenses is a good savings goal for such people.
Great: Nine months of expenses
If you save nine months’ worth of expenses, you can better weather long-term job loss and major home or medical emergencies.
Once you reach this level of savings, you might well consider your emergency fund built. Send your weekly savings into another financial goal, such as into that vacation or retirement fund. Renew your vow never to spend the emergency fund on anything frivolous, and pat yourself on the back.
