The Importance of Building an Emergency Fund

Read below to discover some useful budgeting and saving tips and learn more about the importance of building an emergency fund.

What are the Primary Purposes of an Emergency Fund?

There are a number of life situations which may require you to use the emergency fund. Having money set aside and not being forced to use your credit card, or borrow money in form of high interest loans in case of unexpected life events, will not only prevent you from getting into too much debt, but will also keep your mind calm and peaceful.

An emergency fund should primarily help you cover your living expenses in case of sudden unemployment, but it can also be useful in case of other unforeseen emergencies that are not covered, or not fully covered by your insurance. A few of these examples are listed below:

• layoff or job loss
• car accident repair or other major auto repairs
• unexpected health and dental expenses not covered by insurance
• major home repairs outside the scope of normal mandatory insurance
• larger-than-expected tax bill
• emergency pet care
• unexpected funeral costs
• unanticipated and unplanned travel

How Much Should You Save in Your Emergency Fund?

Most experts recommend that you should save enough money to cover 3 to 6 months of living expenses.

To establish how much you need to save, you must first make a list of your regular monthly fixed expenses. These expenses may include:

• rent or mortgage payments
• utilities and other must-pay bills
• insurance (health / life / home / auto)
• cable, high-speed internet service, home phone service and cell phone service
• groceries
• debt installments
• car expenses
• transportation costs

If you wish, you can also decide to save some money for discretionary spending.

Once you’ve calculated your total monthly expenses, you should multiply the resulting number by 3 or 6, i.e. by the number of months you have decided to save for.

Start Small, Find Ways to Cut Back, and Put Your Money away Constantly

If you don’t have much money to put aside, or you find it difficult to start saving, it doesn’t matter – just start small. Put away 5 to 10 dollars a week, or simply take the change out of your purse at the end of the day and put it in a jar. Over time, you won’t even notice that this money is missing and you will start setting aside more. Your savings will slowly but surely grow, and this will compel you to save even more.

If you don’t have enough spare cash to set aside and your budget doesn’t yield any extra money to put away, you should start cutting down on essentials, as well as focus on reducing your expenses by becoming more frugal. Here are some tips on how to do it:

1. Stop using your credit card, or consolidate it at the lowest possible interest rate.

2. Establish an amount of cash you can spend each month.

3. Buy a less expensive car.

4. Stop dining out as much as you did before.

5. Take smaller and shorter vacations.

6. Sell some items that you no longer need or want.

7. Ditch bad habits (smoking, drinking, excessive shopping).

8. Buy used clothes, furniture, and all other things that you may need.

9. Put your spare change in a jar.

10. Consider an extra job.

11. Reduce or cut back on unnecessary expenditures such as magazine subscriptions, periodicals, cable TV, unnecessary gadgets, luxury items, expensive foods, etc.

Other Emergency Fund Tips

1. The best way to get started is to open a new savings account reserved only for true emergency situations, and start making regular and constant deposits into this account.

2. A good trick is to treat your emergency fund as a bill – just add it to your weekly or monthly list of bills and pay it together with them.

3. You can also set up automatic deduction each payday, and have part of your paycheck directly transferred and deposited to your emergency savings account.

These are just a few essential steps for building an emergency fund. If you have any other useful suggestions and advice, please leave a comment and let us know.