Emergency Funds: How to Protect Yourself from Financial Distress
March 18, 2019 | By Louis Tully
Stuck in a stressful financial emergency? Wish there was a way you could prevent it from happening again? Well, there is! One of the best things that you can do to keep financial blows at bay is to equip yourself with an emergency fund.
Sadly, too many Americans do not have a healthy mindset with money and therefore lack any kind of savings. Instead, they end up carrying around a bunch of debt, leaving themselves vulnerable to financial emergencies. If this sounds like you, stop everything and come up with a plan to save money. Saving money is the key to financial wellness and when put into practice, can become a wonderful habit that will help you and your family find peace of mind for years to come.
Even if you're not carrying on too much debt and your overall financial situation doesn't feel so bad, one unexpected emergency is it all it takes to flip everything upside down:
- Losing your job.
- Getting injured in a car wreck.
- Falling victim to a natural disaster.
- Taking in a family member in need.
- Major household repairs.
These are just a few of the most common financial emergencies that people are faced with and could easily happen to you.
So, if you want to protect yourself, the best way to do it is to keep an emergency fund handy. This is essentially a savings account that money will go into and never come out unless for a real emergency. Here are just a few ways to start building your emergency fund now so you can ensure yourself a better tomorrow.
How Do I Create an Emergency Fund?
Ideally, you want to have 6x your monthly take-home pay saved up. So, if you make $2,000 a month, your emergency fund should have $12,000 in it. Now, this might sound like a lot, but when you consider what it must feel like to suddenly lose your job, $12,000 in the bank is a lifesaver.
Of course, saving up this kind of money all at once is not all realistic (or even possible). You need to start off small and chip away at it over time. To do this, plan to set aside a certain percentage of your income every month. Whenever your paycheck hits your checking account, be sure you're setting aside some if it for your emergency fund. An easy way to do this is to first figure out how much you can afford to take out of every paycheck and then set up an automatic transfer from your checking to your savings account. This auto transfer should be reoccurring on every day you get paid from your employer.
In the event that you end up pulling from your savings, you need to make it your number one priority to put that money back as soon as possible. This will help you stay on track and keep you motivated to keep saving. Ideally, you should never pull from your savings unless it's an actual emergency. Otherwise, learn to go without. It's better to have cash in the bank than in your pocket.
Budget Your Income
As mentioned, in order to save money, you need to first find out how much you can afford to save. Likewise, you need to make sure all your dollars are going toward what they should be. In other words, be sure you're getting all your essential bills paid before you start giving money to yourself. Here's a breakdown of what we mean:
Your monthly income: $2,000
- Rent: $600
- Car payment: $230
- Insurance: $80
- Phone: $50
- Electric: $80
- Water: $35
- Cable / Internet: $75
- Gas: $75
- Groceries: $250
- Entertainment: $125
Remaining monthly income: $400
After all your monthly bills are paid, and you've set aside money for gas, groceries, and entertainment, it looks like you'd have $400 leftover. This means that you can comfortably save up to 20% of your income in savings. At this rate, you could reach your emergency fund goal in 30 months (or two and a half years).
Where Should My Emergency Fund Go?
You want to be able to access your cash quickly in case an emergency does strike, but you don't want to make it too easy for yourself to get to either. If your money's easy to get to, you might be more tempted to pull funds prematurely.
A good place to start stashing away your emergency fund would be a standard savings account from your bank. On second thought, maybe a savings account from a different bank is best. Opening a savings account with your primary bank will make it easier than ever to transfer funds from one account to the other. This might make setting up the automatic transfer to your savings easy enough, but it also makes it just as easy to transfer that money right back to your checking account. Whatever you decide to do, it's best to exercise a little self-discipline in this area. Keep your money safe in savings and your savings will keep you safe from financial emergencies.
If you happen to find yourself in financial trouble before you've had a chance to build up your savings, there are still plenty of ways to pick up last-minute cash without hassle or fuss. You don't have to pawn your valuables and you don't have to bug your folks for help either. The next time you're strapped for cash, reach out to a title loan store near you and see just how easy picking up fast cash can be!