When it comes to money, quite a few families in America have barely enough to make ends meet, so when the topic of emergency funds come up, the majority of these couples will roll their eyes and say something like, “I’m barely making it. How am I supposed to save up an emergency fund?”
Or you might hear something like, “That’s what credit cards are for”. This is unfortunate because having cash on hand for emergencies not only allows you to take care of things when unfortunate things occur in life, but it also allows you to have some peace of mind.
According to Finance experts, Manisha Thakor and Sharon Kedar, 64% of American don’t have enough funds to come up with $1,000 should an emergency arise. That is disheartening.
It’s not that people don’t want to save up a small reservoir of money, because they do. It’s just that oftentimes when it comes to finances, a majority of people lack the discipline and wisdom needed in order to steer clear of debt and sock money away each time payday rolls around.
Why should you have an emergency fund?
The obvious reason for having an emergency fund is that you’ll have peace of mind when it comes to taking care of unexpected things. For example, the car breaking down, the refrigerator going out, the dog needing a vet visit, or a sick relative needs you to travel to help him/her.
In addition, having an emergency fund helps you feel empowered. Instead of money controlling you, you are controlling your money and your cash flow. Too many women spend, spend, and spend some more as if saving is outdated or out of style. But having peace of mind beats any pair of shoes or handbag that you can buy.
In addition, beginning your emergency fund helps you begin to get clear about your financial future. After you save up the amount you decide is going into your emergency fund, perhaps then you’ll be so delighted that you actually saved that amount, you’ll want to set another savings goal for yourself. Then, when you reach that goal, you set another one, and so on.
How much money should you put in the emergency fund?
Now that you know why you want to start saving for an emergency fund, it’s time to decide just how much money you should put in it. Opinions vary on this by experts and perhaps your spouse or partner. Questions arise like:
- “Should I pay down my debt or put the money toward an emergency fund?”
- “What should I do after I hit my goal?”
Financial expert Dave Ramsey states that you ought to begin by paying off your debt and then saving $1,000 in your emergency fund. Then, after that, you can begin saving enough money to cover yourself should you need 3 to 6 months living expenses.
Yes, this means that you initially save $1,000, then work very hard at paying off your consumer debt, and then figure out how much money you’d need to live in case you got laid off or had to stop working for some reason. Then, start socking that money away.
The actual amount of money you want to put into your emergency fund is up to you, but most financial experts assert that you should put between 3 to 5 percent of your gross income in.
If you owe consumer debt, pay that off if the amount isn’t too huge to tackle in a short time. If it’s quite large (and this is frequent), save up $1000 to $2,000 for your emergency fund and then begin paying more than the minimum amount toward your debt. Once you get that debt taken care of, then resume saving money for emergencies.
The amount you decide on can vary according to different factors too. For example, if you freelance, you may want to put more money in the emergency fund in case work gets extremely slow for a long period of time. It really boils down to what you’re comfortable with and what type of budget you’re on.
A prime example
Let’s take a look at Julie. She’s an online marketer for a small company and has a goal of $3,000 for her emergency fund. She’s 28 years old, a single mom with one daughter and is on a tight budget. She has one credit card that she owes $1200 on and pays rent for her apartment. She decided to start saving for an emergency fund because she’s tired of being broke and worried.
For now, Julie is paying the minimum amount on her credit card balance and putting whatever money is left after paying bills toward her emergency fund. She’s at $1,800 now and she’s been doing this for 6 months.
She’s really buckled down and stayed within her monthly budget, cutting out all unnecessary spending. Being able to save more than half of her goal makes her feel great and proud of herself. She’s not as worried anymore and believes she is on the right track with her financial future. Once she gets to $3,000, she is going to get her credit card paid off as soon as possible and then continue on toward a $10,000 goal.
Julie is excited about her financial future.
There’s no question that having an emergency fund will be quite an asset for you, as it certainly can be helpful if an unfortunate situation occurs and helps keep you focused when it comes to your finances.
If you feel you need expert advice or some accountability, you can always consult a financial expert or coach. Sometimes all you need is someone to come alongside you and give you the knowledge and encouragement in order to get the ball rolling.
Once you consistently take control of your finances, you’ll find that it becomes a habit and your financial future will be brighter because of it.
Now, take some time and think about how much money you’re going to save up for your emergency fund and the route you’ll take to accomplish that goal, because the reality is that you can.