Emergencies Happen...Are you Prepared?
By Karen Neorr
Owner and Finance Coach, The Savvy Finance Coach
The Boy Scouts have it right. Their motto, “Be Prepared”, means to always be ready, willing, and able to do what is necessary in any situation. These two powerful words are aimed at young scouts but apply equally to you and your personal finances. “Being prepared” can enable you to deal with those unanticipated financial bumps in road, resulting in a more fulfilling and satisfying life. As it is, most American’s don’t have enough savings to be prepared for those bumps, leading to anxiety, insecurity and debt. Are you ready for a financial emergency? If not, you need an emergency fund.
What is an Emergency Fund?
Emergencies don’t happen often, but they do happen, so they need to be planned for. An emergency fund is a safety net of readily available funds that can be used to deal with financial emergencies such as major medical issues, unplanned travel, major home or car repairs, or job loss. Having an emergency fund will prevent you from getting into risky financial situations such as credit card debt or dipping into your home equity or retirement savings.
Emergency Fund Basics
Emergency funds need to be liquid, so in an emergency you can access cash quickly. The safest place to keep emergency money is an FDIC or NCUA insured savings account. Although these accounts earn very little interest, your funds are guaranteed to be there for you when you need it most. The amount of money you could earn from investing your emergency savings will not be worth the hassle of having to cash out those investments.
Keep emergency savings in a separate savings account for simple accounting – “set it and forget it”. Co-mingling different types of savings can be confusing to track and increases the risk of withdrawing emergency funds unintentionally.
Financial professionals recommend varying levels of emergency savings depending on your financial situation and lifestyle. For people who have high-interest debt, keeping a smaller emergency fund of $1,000 while paying off debt may be acceptable. Once high interest debt is paid off, have at least 3 months of living expenses stashed away, or better yet, 6 months. Calculate one month of expenses as if you truly just lost your job and had to cut all unnecessary expenses. In an emergency, you would ditch the cable TV subscription and eating out three times a week.
How do I Save for Emergencies?
Is your budget already so tight that you can’t imagine saving months of expenses, let alone $1,000? If you had a loved one that needed money for a medical emergency, wouldn’t you be able to scrape together $1,000? I bet you could, and it’s better to do it now than when the real emergency hits. The emergency will happen and the last thing you will want to do is frantically scrounge around for money or get into debt.
Start by scrutinizing your budget and cutting out the easy stuff, like the candy bar from the gas station (you don’t need it anyways…just sayin’). Maybe you could spend $10 less a week and pop that into your emergency fund. Sell some stuff, have a garage sale. You know that faux fur purse that your mother-in-law bought you last year for your birthday? She won’t even notice it’s gone…Tax returns and work bonuses are also a painless way to sock some cash away. Work some extra hours. Get a second job. Ask for a raise. There are lots of ways to save money or increase your income if you are creative and motivated.
Other Benefits of an Emergency Fund
Having an emergency fund can be a blessing in your life, turning painful emergencies into minor inconveniences. Knowing that you have a financial safety net can do wonders for your peace of mind and significantly reduce the anxiety that comes with living on the financial “edge”. Saving money for emergencies also develops good money habits. Knowing that you are prepared for a financial emergency is a foundation that you can build on. Once you’ve established your emergency fund, you can work on other financial goals with more self-confidence. Having an emergency fund may even give you flexibility to take on more financial risk. Are you considering a new job? Do you want to start a business? If you have enough money socked away, changing your career path won’t be so scary.
Building your emergency fund can be a lot like becoming an Eagle Scout - it will take months of hard work, patience and maybe some sacrifice, but once you have reached your goal, your sense of achievement and security will be worth the effort. Emergencies do happen; although we can’t predict what, when or how, we can be prepared financially. My last words of advice, if you are struggling with building your emergency fund, you might consider hiring a personal finance coach. A personal finance coach can serve as a teacher and accountability partner for you as you work towards developing sound money management habits and a secure financial future.