Life is full of unexpected events. You wake up one morning to find the refrigerator has gone out. Or you leave to go to work one day and the car won’t start.
Things can happen suddenly like job loss, medical bills, or home/car repair. If you don’t have the money to cover these events you are most likely going to borrow the funds or put the expense on a credit card. Borrowing money will only make the situation worse.
We need to be prepared for emergencies. How can we do this? By building a basic emergency fund.
First, make sure you have a savings account. If you don’t have one, get one and name it emergency fund.
Make sure you don’t get an ATM card for your emergency fund. You don’t want to use this money to cover shortfalls. You want this account to be difficult to use. You don’t want to have the temptation to pull money out one evening for dinner because you don’t feel like cooking. Likely, the funds won’t return.
Next, start building the funds in the account. Your goal should be to have at least $1,000.
Here is a question that I hear most often: “Where am I going to get this money?” There are several ways to do this.
- An easy way to get started is to set up an automatic draft from your paycheck. Have the funds go directly into your savings account and pretend you never got it.
- Spring is here, have a yard sale. Sell some items on eBay. Go through your house and get rid of the items you no longer need.
- Tax refund. It’s that time of year. Make it your goal to put $1,000 in an emergency fund and use the rest to go towards debt.
Another great reward for having an emergency fund is that it can save you money in other areas. For example, if you have an emergency fund in place you can raise the deductible on your car insurance. Raising your deductible will cut your monthly insurance expense. This savings can be put towards other debts. If you are debt free, you can put this extra money into your savings account.
You don’t want to find yourself selling assets or cashing in your 401(k) to get yourself out of a financial emergency.
You also don’t want to find yourself taking out payday loans or taking cash advances from credit cards for emergencies. These debts will add up faster than you think and you could end up not having the funds to pay your creditors back for the funds borrowed.
Building this emergency fund will give you peace of mind and make it harder for those emergencies to force you deeper into debt.