The best way to make your finances disaster-proof is to have an emergency fund. Take note that this is not just any amount that you can save. It is very important that you make careful calculations about the amount that you will put in this fund because falling short of what you really need might end up putting you in a tight spot. At the same time, saving too much for this fund might make you lose investment opportunities that could have grown your personal net worth.
Having this fund with you is just like bringing an umbrella with you even when the sun is out. You know that your schedule for the day will not be ruined by bad weather. Even if it rains, you know that you can proceed with your itinerary without getting wet. You do not have let your favorite dress or coat be ruined by the rain. Life will go on as planned and a little rain or a downpour will not really destroy your day.
An emergency fund will provide you the same security. Your life does not have to stop just because something unexpected happened. Your finances do not have to suffer just because an unplanned expense has to be met. You do not have to rely on debt to pay for something that you are suddenly obligated to meet. The usual stress associated with any emergency can be lessened because you know that you have prepared for it before hand.
Unfortunately, not everyone in this country can feel the same way about their finances. An article published on CNBC.com revealed that a third of Americans do not have any savings that can help them survive an emergency. This even includes those who are earning 6-figure incomes each year. The statistics from the study done by Pew Charitable Trusts revealed that 4 out of 10 respondents admitted that they do not have $2,000 to cover an emergency situation.
If you think that you do not need this money and that you can wing it when necessary, you might want to rethink that perception. Even the most resourceful and resilient person need to make preparations to minimize the stress associated with emergency situations. Before you confidently say that you do not need an emergency fund, you may want to take a look at the specific situations when you will need to have one. If you think you can wing it – then do not save up for this fund. But if you have doubts that you can survive these situations, then you better start working on your savings.
7 moments when you will be glad you have a reserve fund
There are 7 specific moments in your life that you will thank the highest heavens that you have an emergency fund.
You lost your job. One of the important lessons we got during the Great Recession is that no job is secure. Even those who are high up the organizational chart can be laid off if it means saving the company from bankruptcy. While you do not want to be pessimistic, you need to accept the reality that nobody is indispensable. You can be laid off no matter how secure the company may seem. If you lose your job, where do you think your family will get the means to pay for basic necessities like food and clothing? What about your mortgage and other debt payments? Your emergency fund can cover these expenses while you try to look for another job.
You cannot work with your boss. Sometimes, you lose your job not because you got laid off. There are times when you just do not want to work with your boss anymore. According to an article published on SmallBusiness.Chron.com, a lot of employees leave the company because of their boss. The data was taken from the study conducted by researchers from the Florida State University and it revealed issues that employees have with their boss. This includes managers who failed to keep promises (39%), did not give credit when it is due (37%), gave the silent treatment (31%), made negative comments about them to others (27%), and blamed them for their own mistakes (23%). If you feel like your boss makes your life a living hell, your emergency fund can give you the freedom to resign and look for a better job.
You are going through a divorce. This process is not just emotionally stressful, it is also financially draining. If you are not the breadwinner in the family, having a reserve fund will really come in handy. You might not have access to the finances of your soon-to-be ex-spouse anymore. That can prove to be a problem – unless you have your own cash stacked away somewhere.
You got into an accident. No matter how small or serious your accident is, an emergency fund can help you get the treatment that you need. Getting into an accident is grave enough – stressing about the money that you will use to pay it off will only aggravate the situation. Try to save yourself from feeling this much stress and just save up for unexpected expenses.
You are a victim of a natural disaster. According to III.org, the losses caused by natural disasters amounted to $16.1 billion in 2015. Among the disasters that can cost the average American includes flooding caused by thunderstorms, fire, winter storms and cold waves. Any of these can cost you money and you need an emergency fund to help you pay for the incurred losses. This will allow you to rebuild your life faster after that disaster.
You or a loved one is diagnosed with a serious illness. Another thing that you need to consider preparing for is a serious illness. It could be you or a loved one. If you do not have the money to pay for treatment, you might opt not to get the help that will make you feel better. Or, you can put yourself in debt just to get you or a loved one the treatment they need. Do not put yourself in a position wherein you have to compromise your health.
Your spouse passes away. Finally, you will be glad to have an emergency fund when your spouse or partner passes away. If they are the breadwinner, you will find yourself financially at a loss if you are not ready with an emergency fund. Instead of just dealing with your loss, you have to face the daily financial obligations that will now be on your shoulders.
Most of these situations will happen to all of us – at one point. The question is, how can you prepare for these so you will not be left financially broken?
Tips to help you build up your emergency cash fund
Your emergency cash fund can help you get out of really tight spots. It is not a pessimist way of thinking. We all know that things happen whether we like it or not. Sometimes, there are factors beyond our control that lead us to these unexpected and costly events in our lives. The best we can do is to prepare for it beforehand.
Setting up an emergency fund is not as simple as saving your money in an account. You have to be smart about it. You need to know what type of reserve fund you need to save up for. Not only that, you have to approach it with a strategy in mind.
A lot of people have tried to save up for this fund only to fail because they succumb to the temptation of spending. Sometimes, they use it one the wrong emergency. It is very important that you set the rules that will help you reach the target amount in your reserve fund. Here are some tips that you can use to help you meet your emergency fund targets.
- Start with a low amount. If you feel like the amount you are saving is robbing you from what you could be spending, then you can start low. It does not matter how much you contribute as long as you start now. Start with a low amount and then gradually increase your contributions when you have the extra money. Soon, you can reach your target amount.
- Find ways you can save on your current expenses. How about giving up your weekly date night and just doing it every other week? The budget for the date nights you will spend at home can be put towards your emergency account. Or you can cut back on your junk food budget. You can also rethink your subscription plans to try and bundle them up to save on your monthly expenses.
- Sell the things you are not using. You can also hold a yard sale so you can declutter your life. Anything that you do not need should be sold and the profit you will gain can be added to your emergency fund.
- Automate your savings. Finally, if you have calculated that amount that you can save each month, set it up as an auto debit. That way, you will not miss it from your paycheck because it is transferred to your savings account before you can withdraw it.
In creating an emergency fund, there are three important things that you need to look into. Here is a video that will help identify these 3.