The illustrious emergency fund has made its way around dinner table conversations through the centuries. Everyone has heard of them, yet a majority of households don’t have one. The importance of having money set aside for an emergency cannot be talked about enough, though. Every single homeowner should have an account that they could turn to in the face of an emergency.
How Much Should the Emergency Fund Be?
Something many people wonder is just how much is adequate for an emergency fund? A few months, a few years, or something in between – what is the right answer? The experts generally tend to steer people towards saving at least 6 months’ worth of daily living expenses. If that number seems too outrageous to you at the moment, consider at least starting with 3 months. This will at least give you protection in the short-term if something were to happen to your steady income. After you save up at least 3 months, you can start working on building that account into a larger one that totals around 6 months’ worth of necessary funds.
What are the Funds For?
Generally speaking, the emergency fund is meant to help you pay your bills in the event that you were to lose your regular income. Let’s say you got hurt and you were unable to work for several months or you lost your job and were only collecting unemployment income, which usually does not even come close to the income you were making. The funds you have set aside will help you to continue to live the same lifestyle without having to worry too much.
Another aspect of the money you have set aside for an emergency could be just as the name suggests, used for an emergency. Let’s say your roof collapsed and it needed a few thousand dollars’ worth of repairs. How would you pay for it? While you might have some insurance coverage, not everything will be covered, in which case you would need the emergency money you have set aside to help you through the difficult time.
Typical Reasons to Use Emergency Money
Aside from the major reasons described above, there are many general reasons people have to turn to their funds set aside for an emergency, including:
- Medical emergencies – These can get quite expensive even if you have insurance, so having money to cover you in the event of a serious injury or illness can be very helpful
- Car issues – Cars are a necessity, but sometimes they can be a large financial drain. Aside from making your car payments, you should have money set aside for the troubles your car could experience outside of a car accident as most car trouble issues are not covered by any insurance.
- Fire or flood – No one wants to think of something bad happening to their home and their belongings, but it is better to be prepared than be sorry. While insurance might cover your home and some of your belongings, it will not cover everything that you have to pay for and do in order to recover from such a disaster.
How to Start Saving Money
What if you are tapped out every month and you live paycheck-to-paycheck? How are you ever supposed to get extra money set aside? Here are a few tips:
- Take a close look at your recurring expenses and determine where you can cut and/or save. Things like cable, magazine subscriptions, and coffee habits can be stopped or at least decreased so you have more discretionary money to put away.
- Get a second job – Today it is not unheard of for people to have more than one job, especially with the availability of jobs that you can do from home. Even if you work a second job temporarily until you have enough money set aside to feel more financially secure.
- Change your lifestyle so that it fits within the means you have while allowing you to save. You can cut things out like eating out, getting your nails done, or any other services you pay for that you probably could do on your own.
Having an emergency fund set aside is crucial to your financial security now and in the future. Even if you save a small fraction of the money you need every month, it is one step closer to your goal. Eventually, you will have the money that will cover any major catastrophes that happen in your life, which will help you get through a difficult situation much easier than if you had to deal with financial issues on top of the disaster occurring at that time.
In the worst case scenario, you could prevent yourself from suffering a foreclosure or at least derogatory credit due to paying your housing payments late. The last thing you want to worry about is the roof over your head as you deal with the issues going on in your life.Click to See the Latest Mortgage Rates»