According to reports, only 39% of Americans have an extra $1,000 kicking around to be able to pay for financial emergencies. So if you’re in the group of Americans who don’t have an emergency fund, you’re not alone.
But you need to have one. Life is unpredictable and unfortunately, it runs off money. There’s no telling what tomorrow will bring so it is in your best interest to ensure that you are financially prepared for anything that you might face.
What is an Emergency Fund?
An emergency fund is an amount of savings that you have specifically reserved for financial emergencies. Financial emergencies can include losing your job, an unexpected trip to the hospital or something as simple as having to replace a major household appliance.
Most financial experts recommend having three to six months worth of your monthly bills saved in an emergency fund.
Planning Your Emergency Fund
Before you can save for your emergency fund, you need to understand how much money you should save. Your first task is to take a detailed account of all of your monthly bills which include everything from your monthly rent, utilities, phone, to your cable and internet.
Next, you need to estimate your variable expenses. These are the things you need to purchase monthly or weekly but aren’t necessarily considered to be bills. Your variable costs include things like your groceries, dog food and prescriptions.
Once you have both your monthly bills and an estimated monthly amount of your variable costs add them up. This is your monthly expenses. This amount should cover everything you absolutely need to live and pay your bills, but won’t include things like entertainment costs or extra spending money.
Example: If your monthly bills are $2,000 and your estimated variable costs are $1,000, your total monthly cost equals $3,000.
How to Start Saving Now
If, like in our example, your monthly expenses are $3,000, three months of your bills is $9,000 and six is $18,000. Chances are you aren’t able to save or make an extra three-to-six months worth of your salary in a short time. Let’s face it, who really can? So you’ll need to start out small and make your first goal manageable.
If you don’t have any money for an emergency fund yet, start out by saving a smaller amount like saving $1,000. Once you’ve achieved that grow your account to a month’s worth of bills followed by three then six. It won’t happen tomorrow but you’ll be well on your way if you make a point of doing it.
Emergency fund savings pro-tip: Start a separate savings account and save every penny you can!
Do you already have an emergency fund set up? Share your tips in the comments below!
- How to Launch Your First Emergency Fund in 3 Days
- Do Wealthy People Need Emergency Funds?
- 4 Reasons to Have an Emergency Fund
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