The refrigerator stops working. The car breaks down and needs to be towed to the garage. It’s a scorching 90-degree summer day and the air conditioning unit decides today is the day it will no longer function.
These are just three examples of unforeseen expenses in a world full of endless possibilities. Each one of these with the ability to set you back $500 or more. Yet an alarming statistic shows that 47% of individuals would find it challenging to cover an unexpected expense of $400 or more.
Establishing an emergency fund is financially crucial. A good rule of thumb is to set aside 3 to 6 months of expenses for some degree of financial security. Therefore, average monthly expenses of $2,500 sets an emergency fund goal of $7,500 to $15,000. This figure can be overwhelming–so don’t panic and start small.
- Set a monthly savings goal. Determine an amount you can set aside from each pay period. Even if you feel like it’s not substantial, the important part is to just start. Even if it’s $50 per paycheck, it will begin to accumulate over time and help you form a savings habit.
- Begin an automatic deposit/transfer. Many employers allow for more than one account to be set up for payroll direct deposit. Have a portion of your check directly deposited to a savings account making it even more convenient–and out of sight, out of mind.
- Save your tax refund. Rather than splurging on the 60” smart TV you’ve had your eye on, add the tax refund to your emergency fund instead.
- Save your change. I hoard my change, typically at the bottom of my purse. Recently I was surprised to learn, after I could no longer carry my purse due to the weight, that I had racked up $61 of savings in coins. Change adds up and it can add up rather quickly. However, my recommendation would be to empty your pockets into a jar at home and maybe save yourself the expense of a shoulder injury.
- Save dollar bills. Like the strategy listed above, anytime you receive a $1 bill as change, do not spend it. Add them to your coin jar or place them in an envelope that can be deposited into your savings account.
- Continue to pay debt to yourself. It’s always exciting when you’ve made the last car payment or paid off a credit card, but rather than viewing it as extra spending money continue to pay the monthly amount to your emergency fund. Who knows, you may save enough to pay cash for your next large purchase.
- Round up in your checking account. When recording a transaction into your checkbook round up to the nearest dollar. For example, if your purchase was $56.05 enter $57 on your checkbook register. However, this may not be the best strategy if you are a bit obsessive when it comes to balancing your checkbook. (According to website Statisticbrain, only 21% of Americans actually fully balance their checkbooks so maybe that isn’t really a problem!)
So, what is not an emergency? Your semi-annual car insurance bill is not an emergency. Holidays and birthdays are not an emergency. That “must have” item that’s on sale that you don’t really need is not an emergency. It’s important to remember that an emergency is something that is a serious, unexpected situation requiring immediate action. Save your emergency fund for the real emergencies to enjoy the most basic form of financial security.