One of the best things that you can do for your future financial security is to establish an emergency fund that can be used in the event that unexpected expenses arise.
Having an emergency fund allows you to handle these small financial emergencies without having to resort to the use of expensive credit or putting off the issue until it snowballs into a bigger deal.
Although having an emergency fund is key to financial stability, many people do not have one, preferring instead to use credit cards in these cases and often carrying a balance and paying interest on the purchase for months before they can pay it off.
If you do not have an emergency fund, here is how you can start one.
Decide How Much To Save In The Emergency Fund
The first step is to decide how much money needs to be in your emergency fund. This amount will vary for different people depending on their financial situation and their current expenses.
The goal should be to have enough money to cover up to six months of your regular expenses in the event that you face a significant period of unemployment or significant medical costs due to an illness or injury. However, an emergency fund that contains at least $1,500 is enough to cover many unexpected incidents.
The goal is to have enough of a safety cushion that you will not have to pull out the credit cards to pay for an unexpected expense.
Make A Savings Plan
After you have determined how much you would like to save in your emergency fund, you will need to make a plan for how to save that amount.
Many employers make it easy for you to save automatically by providing a way for you to deposit your paycheck into multiple accounts. Simply open a savings account to hold your emergency fund and authorize your employer to deposit a portion of your paycheck into it.
It would be good to deposit at least 10% of your after-tax income into this savings account, but adding at least $50 per paycheck will go a long way.
Stay Away From The Emergency Fund Account
Your emergency fund will never grow to the size that it needs to be if you are continuously dipping into it to pay for routine expenses.
Once the money has been deposited into the account, it should remain there until a true emergency arises that you cannot pay for with the money from your paycheck while still paying your other expenses. These financial emergencies include things like paying to repair your car so you can travel back and forth to work, replacing a broken water heater or furnace in your home, or paying medical bills from a hospital or emergency room visit.
Vacations and going out with friends are not good reasons to dip into your emergency fund. The longer you can leave the account alone, the bigger the balance will be when you actually need the funds.
Do you have an emergency fund? Why or why not?