Establishing an Emergency Savings Fund
Emergency savings accounts are crucial to a successful personal finance plan. Before you ever pay off your debt or look to invest, you should have a sizeable savings account dedicated to be used at a moment’s notice for an emergency. You never know when you will need to put a down payment on a new car, fix an old one or have an accident and need to pay hospital bills.
Emergency Fund Rules
Find the best savings rates you can and start building your emergency savings month over month. You should start contributing to it steadily and consider the money to be gone in a sense. This will help you stay disciplined if you’re ever tempted to tap into these funds. Always make sure that you keep your money in a high yield savings account. You’ll need the funds to be liquid so you can access it whenever you need.
Save up until you have about 6-8 months worth of expenses in your emergency savings. If you can get up to a year’s worth of expenses, that would be ideal. This means that you could basically survive for a year without working or needing to tap into other assets or funds. Most people are able to find a job within that time so it makes sense not to build a fund that’s more extensive than that.
Emergency Needs
There are a number of situations you can find yourself in where you wish you would have had an emergency fund. If you are involved in a serious accident or develop a health issue, an emergency fund could cover the costs along with your health insurance. Did you know that about 60 percent of new bankruptcy cases are due to high medical bills that people cannot pay? Don’t get caught in this situation.
If you drive an older car, that’s another reason you would want an emergency fund. You could also create one for your car specifically. Most people do not take the time to consider the cost of repairing a transmission or a new set of tires for their car.
Emergency savings accounts are a great idea for everyone because it makes sense to plan ahead for future costs that will come unexpectedly. When building up your fund, treat it like the most important thing you can do with your finances and sacrifice all other discretionary expenses until you reach your objective. You will feel much better knowing you have a safety net in case you need it.
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