According to a study done by CNBC, roughly 60% of Americans don’t have enough money saved to cover a $1,000 emergency. Saving a small amount in an emergency fund can go a long way in an emergency event. An emergency fund is a fund you have set aside to assist with any financial hardship life may throw your way. When life throws these unexpected events your way, these can be very stressful and costly.
The top emergency expenses are the following:
- Job Loss;
- Medical;
- Home and car repairs.
As a rule of thumb, your emergency fund should be between 3 months – 6 months worth of monthly expenses. The size of your fund varies by person depending on your lifestyle, costs, and income. While saving this much seems scary and stressful, the best way to chip away at it is to put away small amounts every week, month, etc.
Simple Calculation:
1.) How much is your monthly mortgage or rent?
2.) How much do you spend on utilities, internet, phone bill, etc?
3.) How much do you spend on food each month?
4.) How much do you spend on transportation costs? (Metro card, car payment, car insurance, etc.)
5.) How much do you spend on other expenses? (Health care, personal care/fun, etc).
Once you have figured out this and add up all the totals, multiple this by 3 or 6 to get your 3-month and 6-moth emergency fund.
When you start your emergency fund, you should place the fund in an easily accessible bank account. I place mine in an online-savings account since it is an account I don’t keep my main funds in. This helps me not get into bad spending habits and access my money when I don’t need it. Additionally, the online savings account earns a higher interest rate than my main account.
Having this set up helps you keep your stress levels down and remain calm when an emergency does happen. When you are prepared and have money saved away, this will not threaten your financial well-being since you are already prepared for a crisis. When you are prepared for an unexpected event, this will reduce your chances of making a bad financial decision such as taking out a high-interest loan or putting the expense on your credit card to make it through the event. Additionally, having this set aside will give you confidence in your day to day life as you can handle unexpected events.
Once your emergency fund is set up, you will be well prepared to handle the unexpected twists life throws at you and can live life how you want.