My father passed away last month. Since he didn’t have a life plan or life insurance, the financial burden of the funeral fell upon me and my siblings. Thankfully, my husband and I had an emergency fund, and we were able to help pay for our portion of the funeral. You’ll be able to hear more about the circumstances because I am guest posting about my experience on Money Saving Mom.
An unexpected event can happen to anyone at anytime. It might be the death of a loved one, an unfortunate hospital visit, or a job layoff. What’s important is that you’ve planned for these unexpected events by having an emergency fund. This is your financial cushion in case something goes wrong and you need to access money quickly. Below are tips to build up an emergency fund:
How Much to Save
It’s recommended that you have 3-6 months of living expenses in an emergency fund. To determine what’s best for you and your family, examine your financial situation, income, and needs, then decide how much of an emergency fund you should set aside.
Before you begin building your emergency fund, be sure that you are meeting your basic living expenses. And as you are building your fund, reduce your spending in areas of your budget such as food, clothing, etc. to avoid going into debt. Here are some helpful tips on budgeting.
Dave Ramsey, a personal money-management expert, recommends that if you have debt, the first step is to save $1,000 in an emergency fund, then start eliminating your debt. Once your debt has been eliminated, then you can build your 3-6 month emergency fund.
How to Start Saving
After reviewing your financial situation, determine how much money you’ll be able to put aside in your emergency fund each month. Even a small amount like $10 is better than nothing, and it will begin to add up quickly. The important thing is that you get started if you haven’t done so yet. For our family, some months we only have an extra $20 we can add to our emergency fund. It just depends on that month’s expenses that need paid.
If you feel like you are already living from paycheck to paycheck, then start small by cutting back on expenses and looking for ways to generate extra cash. You might also consider using next year’s tax return to get your emergency fund off to a great start.
Set It Aside and Don’t Touch It
It’s wise to keep your emergency money in a place that is not too easily accessible so you aren’t tempted to use the money for items that aren’t necessarily an emergency. David Bach, the author of The Automatic Millionaire, said, “The reason most people don’t have any emergency money in the bank is that they have what they think is an emergency every month…A real emergency is something that threatens your survival, not just your desire to be comfortable.”
You can place your money in a high-interest savings or money market account. If you think you’ll be tempted to use the money, then set up the account at a bank across town and don’t tie a debit or credit card with the account. It is a good idea to keep a few hundred dollars in cash in a safe place within your home just in case.
After you’ve saved enough for your emergency fund, then you can begin to save for your other goals. As a family, we enjoy going on trips together. Once we get our emergency fund back up to where we want it to be, then we will begin to start saving for our next trip. We also want to pay our mortgage off faster, so when we have extra money one month, we like to put it toward our mortgage.
It takes time to build up an emergency fund, but it’s worth it because it will prepare you for those unexpected events that happen in life. Within a few days after my father passed away, me and my siblings had to come up with enough money to cover the cost of the funeral. Coming up with a large sum of money in such a short time could have been a financial disaster, but luckily we had an emergency fund to help out in a time that we needed it.
Do you have any tips or advice on building up an emergency fund?