Why you Need an Emergency Fund and How to Get Started
An emergency fund is essential for life’s unexpected turns. Just when you think you are on track paying your debts and having a little extra cash left over for some fun, the unexpected happens. Your car may break down, or your spouse or partner may lose his or her job, or you may be laid off from your job. No matter the curve in your life’s path, there is a way to straighten it and beat the burden that it intends to cause – start an emergency fund.
1. Decide how Much you Want to Save
This is the first step in beginning an emergency fund. The standard requirements for an emergency fund are six months of your gross salary or income. This can be your starting goal.
2. Calculate Your Total Income
Take your entire income total from your job and other forms of income, such as rentals, or interest from investments. Add up what you make monthly in income. This is what you have to work with. As a general rule, 10 percent of this should be saved each month towards your emergency fund.
3. Calculate Your Expenses
Review and log your entire monthly expenditures. This includes routine bills, such as electricity, gas, and phone, to your variable expenditures, such as credit cards, household items, and personal hygiene products. This total is your realistic view of what you will need saved in the event of an emergency, and it should be equal to six months of expenditures.
As a general rule, you want to learn to pay yourself first. So in your calculations of your expenditures, you want to include 10 percent of your income as a payment to yourself. Make this a standing expenditure. You can set this up as an automatic deposit so that you don’t even see the money. This will force you to make that payment, instead of waiting until the end.
4. Income Minus Expenses
Take your income, minus your expenses, and that is what you have left over each month for additional savings. Take part of this money and deposit it into your emergency fund before you are tempted to spend it on something else.
This is where careful attention to expenditures can be considered. In order to maintain an adequate emergency fund, non-essential expenditures can be re-evaluated for importance. If these expenditures can be cut, that is more money that can be placed into your emergency fund.
5. Open a Special Savings Account
Open a separate savings account that is just for your emergency fund. This fund is not to be touched, unless it is for an emergency. It is essential that this fund always remain at the minimum of six months gross salary and can cover six months of your expenditures. This account should be one that is easily accessible in an emergency.
You never know what may happen financially in life. Not putting money aside for an emergency can be playing a scary game of luck. It is wise to consider having a nice emergency fund to fall back on when the unexpected happens.