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When it comes to saving money, financial experts have always encouraged consumers to think about their emergency funds. This is the amount of money that you will put aside so you have the funds to get you out of unexpected expenses in the future. The use for this money can range between the trivial (e.g. busted transmission in your car) to the serious (e.g. medical illness) expenses.
The irony about living is you will never know what will happen in the future. No matter how careful you are, something is always bound to happen that will get you off track. Even the most careful individual could suddenly end up with an illness or without a job. It is better to be prepared for these events. Apart from being physically, mentally, and emotionally strong, you also have to be ready financially. And the only way you can do the latter is by building up emergency funds.
According the pulse survey results from Bankrate, 28% of their respondents will resort to credit in order to pay for unexpected expenses amounting to $500 to $1,000. 16% of the respondents said that they will borrow money from family and friends. This is a great option because these people usually do not have to worry about high interest rates. The same survey also revealed that 12% of their respondents would use credit cards to finance an unexpected expense. This is a dangerous habit because of the high interest rates that oftentimes accompany credit card debt.
If you want to be prepared for emergency expenses, it is important that you save up for it. You do not want to be caught unprepared at the wrong time.
Survey says Americans are not prepared for unexpected expenses
In a separate survey published on Principal.com, it is revealed that almost half of their respondents will find it difficult to find financial resources for an unexpected expense that amounts to $1,000. The survey was initiated by the Principal Financial Group and conducted by Harris Poll among 1,111 employees. These workers come from small to mid-sized businesses. The survey was done to gauge the financial well-being of workers.
The results of the survey revealed that 17% said that it is difficult to produce this amount, 13% said it is very difficult and 17% said it is extremely difficult. That means 47% of the respondents in this survey said that they will have a difficult time getting the resources for an emergency that will cost them $1,000. Imagine if they were faced with a bigger expense – that could very well lead them to a financial crisis.
To prevent this from happening, you need to build up emergency funds that will give you the resources to pay off unexpected financial needs. There are four important reasons why you need these savings.
Emergency funds can help you avoid a crisis.
If you have the financial resources to spend on an unexpected expense, you may very well be able to avoid going into a financial crisis. Instead of letting a situation get out of hand, you can immediately use the funds that you have to quickly solve a problem. Of course, you can only do this if the cause of the crisis is something that you can control. For instance, if you get sick, you will not hesitate to get treated because you know that you have the funds to spend for it. That can keep you from developing a more serious illness.
Emergency funds can help you survive a crisis.
In case you are faced with a financial crisis that you have no control over, your emergency funds will help you survive a financial crisis. An example of this is a job loss because of an economic situation. Your emergency fund will give you the resources you will need in order to get through the tough situation that you are currently in.
Emergency funds can keep you from debts.
Another reason why you need to save for an emergency fund is to keep yourself from debts. Going back to the Bankrate survey, people who do not have savings usually resort to credit. It is okay if you can borrow money without interest. But what if you have no choice but to loan an amount with a high interest rate? You will be wasting a lot of money paying for that interest amount. You can avoid debt if you have the amount to spend from your savings in the first place.
Emergency funds can give you peace of mind.
Lastly, you need to build up your emergency funds because it will help you life a life that is free from stress. At the very least, you know that your financial situation is one thing that you do not have to worry about – regardless of what the future may bring. This is probably the most important thing that an emergency fund can give you. Even if you are already immersed in problems, you do not have to panic because you have the resources to spend in the meantime. You can concentrate on solving your problems while you continue to have the finances to spend on your needs.
Tips to build your reserve fund fast
According to an article published on NYTimes.com, more than 5 out of 10 American households have less than one month’s worth of income in their savings account. That means if something happens to their job, they can only survive for barely a month before their finances expire. You do not want this to happen so you must be prepared to build your emergency fund fast. The article mentioned that it is possible to build up your savings even if you have a limited income. The thing that you need to overcome is sometimes, psychological. People think that saving up for 6 month’s worth of income is impossible and they give up on the task even before they have started.
You need to overcome this negativity and concentrate on the target amount that you need to reach. There are rules that you need to follow when building your emergency fund and here are some of them.
- Compute how much you need for emergency and reserve funds. Calculate the amount that you need to save for your emergency funds and your reserve funds. The emergency fund is the savings that will be spent for very serious expenses like job loss, etc. The reserve fund is for the more trivial expenses that you did not plan for. For instance, the gift that you need to buy for the wedding of your cousin, etc.
- Review your budget plan. It is also important to review your budget plan so you can include the amount that you need to put aside for your savings. It is best to treat your savings like a bill so that you will put money into it no matter what.
- Downsize your lifestyle. To increase the amount in your emergency funds, you may want to downsize your lifestyle so that you can lower your expenses. At least, this is true if you really want to grow your savings quickly. The more you can sacrifice from your usual expenses, the more you can put aside in your savings.
- Increase your income. While you are saving on your expenses, you may want to boost that by increasing your income too. Try to earn more by setting up a passive income. You can also sell off some of the things that you no longer need so the profits can be added to your emergency fund.
