None of us can foresee the future or predict the hurdles that lie ahead of us. This makes building an emergency fund a financial priority. Building an emergency fund is healthy for your financial well-being since you’re rarely given advance notice of a setback or an accident that will keep you out of work for an extended period. It is also a safety net that can save you from bankruptcy or severe financial hardships in an unexpected change in your income or expenses.
Having a small rainy day fund should be a vital part of an individual’s financial goals. This is of high importance if you don’t already have readily available funds in your account for covering any unanticipated expenses. They provide financial security because they give you funds to fall back on if you become ill, or if you or your spouse loses their job, you incur large medical bills or have an unexpected large bill such as a major car or home repair. You do not want to end up in a situation where you have to buy daily necessities on credit and end up paying for groceries you bought two years back on credit, with a further 10-18% interest, or higher, on them.
Saving your money in a small account for emergencies is a better alternative to taking a loan or cashing in your long-term investments. If you take a loan, paying interest is an additional burden. Cashing out of your investments before maturity means you will lose out on the interest and some part of the original investment. This will also set you back significantly in your overall financial plan.
Success at building an emergency fund depends on consistently saving money regularly and resisting the urge to dip into this rainy day fund for non-emergencies. This money should be kept separate from the general savings account, and otherwise, you will be tempted to dip into these monies even if you run over your budget at a certain point. A substantial part of this emergency fund account should be invested in low-risk funds, and this ensures that your investment does not lose its value if you need the money. Also, it should be extremely liquid to give you access to cash easily and quickly if you need it.
The size of the special savings account will depend on your situation. People often keep three to six months’ salary in reserve. But you will have to decide on appropriate amount-based factors such as your dependents and fixed monthly expenses.
If you are single with no obligations and have a reliable support system of friends or relatives during a financial crisis, you might not need a substantial amount stashed in this fund. This is opposed to paying nursing costs for his aging parents and supporting a young family. The more people you support, the more likely you have unexpected or unplanned costs.
While deciding about an emergency fund, you should also consider the degree of difficulty you’d have in finding a new job if you lost the present one. In the case of a two-income household, the contribution of both parties should be weighed while calculating how much you should keep aside.
You may not be able to gather your emergency fund money together at once. Treat it as a financial goal and add to the kitty over time. Put it in your special rainy-day account if you get a tax refund. Maybe a part of that bonus at work!
To help you reach your goal with your emergency fund, I suggest you prepare a realistic budget that can aid you in reaching this goal. If you wish to purchase a budget spreadsheet, I developed it for a minimal cost visit or cash-budget envelopes visit, https://kgmeyerpc.com/financial-tools/. If you would like the spreadsheet and one that aids in paying down debt with the snowball method for free, you can join my weekly newsletter at https://page.co/l1jo.
If you need help budgeting or with your emergency fund, please reach out to me directly if you are in or near Nashville, Tennessee. I can help you no matter where you are located or find a qualified fee-only Registered Financial Consultant.
