Do You Need an Emergency Fund?
Do You Need an Emergency Fund?
(guest post written by Jenny from ExConsumer.com)Having an emergency fund can make or break your financial plans. There are two things that are certain in life. The first is that eventually we’ll leave this life. The second is that at some point before leaving this life we will run into unexpected expenses.
Cars break. Roofs leak. Jobs get lost. Kids get sick. We get sick…you get the idea.
It’s not a matter of if any unexpected budget busters will crop up — it’s simply a matter of when.
Establishing an emergency fund is one of the single best things you can do to protect yourself and your family when one of these unexpected expenses pop up. Paying off consumer debts if you have them should be a top priority, but before you get started, please set aside some money in an easy to liquidate account — for when an unforeseen emergency sneaks up.
If you feel you couldn’t possibly come up with any money to set aside in case of an emergency, take Gregg’s suggestion and save just one percent of each paycheck. Surely you can come up with just one percent.
Once you get started on your emergency fund, I’ll bet you never miss that measly one percent. You may even realize that you can comfortably increase the amount you’re saving from each paycheck to two, or even three percent or higher.
The bigger that emergency fund becomes, the better YOU’LL be sleeping at night.
How Much Do You Need?
How much you need in your emergency funds really depends on two things.
- Do you have any consumer debts?
- How much are you obligated to pay out each month?
If you don’t have any consumer debts, congratulations! Experts recommend that you keep three to nine months worth of expenses in an easy to access account, like a savings account. If this sounds like a lot of money to you, don’t worry. Just keep adding whatever percentage of your pay you can swing consistently, and it will build up before you know it.
If you do have consumer debts, you can probably get away with keeping about one or two months worth of living expenses in you emergency fund until you get your consumer debts paid off.
How much will one month’s worth of expenses be for you? One month’s living expenses will be equal to the total you are required to pay to creditors for things like your mortgage, credit cards, utilities, etc. You’ll also want to include some money for food, personal care and gas (if you have a car).
If you’re still not sure how much you need each month, the best way to find out is to work up a quick budget if you haven’t already.
When Should You Use Your Emergency Fund?
Once you’ve established an emergency fund, make sure you use it only for emergencies! Going on vacation is not an emergency. Shopping for a spring wardrobe is not an emergency. Putting a down payment on a shiny new car is most definitely not an emergency.
If you use your emergency only for actual emergencies, you’ll avoid having to pay for life’s little surprises on credit. This will help get — or keep — you out of debt. And I think we can both agree, getting and staying out of debt is the ticket to financial freedom, baby.
So save up and sleep easy. Emergencies will be no match for your awesome preparation the next time they show their ugly heads.
(Jenny writes about getting out of debt, becoming more frugal, living lighter, exploring the world of minimalism and all the life that falls in between on her blog, Ex-Consumer )
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http://exconsumer.com Jenny
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http://exconsumer.com Jenny
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