By: Brightpeak Financial
Do you ever feel like you’re one mishap away from serious financial trouble? Or perhaps you’re not the type to worry — even when you should. Either way, most people aren’t prepared. In a recent poll by BankRate, only 38% of respondents said they could handle a $1,000 emergency room visit or $500 car repair. A “rainy day” fund is critical for you and your family, and throughout this guide, we’ll provide tools and knowledge to help you prepare for the unexpected.
Why everyone needs an emergency fund
According to the Federal Reserve, 48% of people can’t cover a $400 emergency without selling something or borrowing money. An emergency fund will not only cover your financial needs, but also your emotional needs. The last thing you want during the stress of an emergency is to also feel panic, worry, regret or shame.
This is why you need a strong defensive strategy to:
- Maintain your financial independence
- Keep you from going farther into debt
- Protect your family from financial troubles
If you’re among those using a credit card as an emergency fund, consider this: The average variable rate on credit cards in America, according to BankRate, is 16.28%. Going deeper into debt isn’t a real plan, and the interest only makes the situation worse. Imagine, instead, that you have $1,000 in the bank standing between you and calamity at all times. That would cover something like a leak in the radiator, a broken washing machine or emergency traveling. It would see you through without going farther into debt — just remember to restock those funds as quickly as possible.
Now that you’ve got the visual of a $1,000 savings buffer, what kind of peace of mind would that provide when smoke starts billowing out of your car? That’s the power of an emergency savings account. It’s your first line of defense from marital strife over money, stress and anxiety about bills, and even bankruptcy.
Action step: Start researching savings accounts today that you can dedicate as your emergency savings account. Our best tip is to open an account outside of your normal banking/checking account, so you won’t be tempted to spend the balance. Set up automatic deposits into your emergency savings account and you won’t even notice that you’re saving!
How big does your emergency fund need to be?
After appointing a savings account that’s solely for emergencies, it’s time to break down your goals and face them one at a time.
Your first goal is to cover unexpected expenses with a short-term emergency fund.
We recommend that most people start with at least $1,000. This would adequately uphold their financial stability from a smaller emergency, like an unexpected medical bill, but that varies from person to person. In a higher-risk situation (expecting a baby, significantly in debt, etc.), you need to save more.
Once you determine the amount you need, stick to it. That way, when emergencies do strike down the road, you’ll know exactly how much is required to replenish the fund.
A long-term goal for emergencies is to save at least 3 months of living expenses. If you’re in a higher-risk scenario, like starting a new business or expecting a child, save at least 6 months.
Pro Tip: No matter what goal you establish, set a deadline for it. There is a reason runners put on a burst of speed when they see the finish line. A deadline is a powerful incentive to finish strong.
How to calculate your living expenses
Living expenses vary from person to person, but getting a ballpark estimate will help you understand how much money you need to save. To calculate your living expenses, try this:
Calculate your monthly expenses. Take a look at your spending and make a list of all your monthly expenses. This includes things like rent or mortgage payments, utilities, medical bills, groceries, transportation, savings, debt repayments, etc. Then, use this basic equation for determining how much to work up to in your emergency fund:
1 month of essentials x 3 = Fully-funded emergency fund
Action step: Use BankRate’s free Emergency Savings Calculator to calculate how quickly you can stockpile your emergency fund.
How to invest your emergency fund
What should you do once your short-term emergency fund is at $1,000?
- Protect it from frivolous spending
- Build up your long-term emergency fund
- Pay off debt
Contact Christian Credit Counselors at 800-557-1985 for help with paying off your debt through our debt consolidation plan!
Get started saving!
You can protect yourself and your family from considerable turbulence and stress if you start an emergency fund today. The action steps and tips offered in this guide are here to help you build a defense system, achieve financial freedom, and enjoy greater peace of mind.