With all the uncertainty lately with drops in household income and increased medical and child care costs, household budgets are stretched thin these days. Families are examining their expenses and how they save for the unexpected. The discussion usually leads to what to do for next time – the topic, the emergency fund.
Is an Emergency Fund Necessary?
Generally speaking, yes, an emergency fund is necessary. What form it takes can vary, but it is a good idea to have an emergency fund. Such a fund can help you avoid high-interest debt, and it helps reduce stress. After all, life is full of changes – many of them sudden and not good – and having that “cushion” can help you feel ready and calm.
How Do You Create an Emergency Fund?
First, determine your expenses. Look at three to six months’ worth of living costs and count on saving that much in a fund. This can help you keep your standard of living for a time if you lose your job, or it can cover a large expense such as vehicle repair. Then determine how long it will take you to save that much and how much you have to take out of your paycheck each month to reach that goal.
How Do You Save for Emergencies?
Once you’ve decided to save, it’s a good idea to change your mentality to put payments into the emergency fund before you pay for anything else. If you can do it by automatic deduction, go for it. See if you can have a portion of your paycheck taken out and put into a savings account. Otherwise, make it a habit to put money in your savings first and foremost, and then take care of your other expenses after.
What If You Have Low Income?
Even if you have low income, you can set aside something each month. Try saving a percentage of your income, such as 5 or 10 percent. It may take you longer, but it will accumulate.
Does It Have to Be Huge?
In short, no. An emergency fund does not have to be massive – but it certainly should cover unexpected expenses. To determine the size of your fund, consider what sorts of emergencies you’d want covered by the fund. Remember that buying insurance may be a more cost-effective way to guard against emergencies, also. Evaluate the scope, likelihood, and potential cost of possible emergencies and this should give you a clearer picture of how large your fund needs to be.