What is an emergency fund?
An emergency fund is an easily accessible account with money to utilize only in the case of an emergency. It isn’t used to buy a new car, television, or to remodel your bathroom. It’s important to understand the purpose of an emergency fund and stick with it!
Why do you need an emergency fund?
There are multiple examples of emergencies that may arise throughout one’s lifetime. A death in the family, a car accident, your house floods, or you have an unexpected emergency room visit….all of these examples require payments, or funding of some type, to help you overcome them. Studies show that those without emergency savings are more likely to accumulate debt.
Some say they cannot afford to have an emergency fund but, experts say you can’t afford not to have one.
How much is enough?
There is no consensus on how much is enough. Some say you should save at least one year’s salary, others believe $1,000 is sufficient. So, the answer is, there is no one right answer. It is up to you to examine your situation, your income, and your needs to determine how much you and your family should save.
How do you get started?
First you have to ensure that you are currently meeting your basic living expenses. To help you get started you should focus on reducing your spending and avoiding debt. Whatever extra money you have in your pocket once you have a manageable budget in place, should go towards your emergency savings account.
1. Start small
If you don’t have too much to save, it doesn’t mean you don’t have any to save! The important thing to remember is that you have to start somewhere. Even if it is only $10 per paycheck, it is a start. It will slowly grow each paycheck and you will be glad to see at least a little money in your savings. Once you get started, you will be motivated to save more.
- Automatic deduction
This is common advice because IT WORKS! Set up an automatic deduction here at the credit union so that each time your payroll comes into your account $10, or $20 goes to your emergency fund. These preferences are not set in stone. If you get a raise or, if your financial situation improves you can increase the amount going into your emergency fund.
- Treat it as a bill
Every month you have a list of bills and utilities that you must pay before you can spend any of your money on the fun stuff. Well, add your emergency fund to your list of bills and pay it at the same time. This makes it non-negotiable to your sensible self and then whatever is left over from your paycheck can be spent on other things.
- Reduce an expense and save it
Take a good look at how you currently spend money and look for things that can be cut back. For example, some of us pay upward of $175 a month for cable services. Call your cable company and find out what other packages are available to meet your needs. Let’s say you switch to a plan that only costs you $100 per month. Put that additional $75 that you would have been paying for cable services into your emergency fund each month! Think about other items you spend on; coffee, magazine subscriptions, vending machines, manicures…etc. How can you cut back to save?
- Round up
Some people use this method to save and, it works great! When you sit down to log your purchases in your checking account transaction register always round up to the nearest dollar. Move that leftover change right over to your emergency fund. Some people save $50 a month on average just by taking the time to do this. Others take the change they get from purchases and put it into a savings jar and then, once a month they make a deposit to the emergency fund. Either way works if you just make a little time to do it.
- Tip Yourself
If you go to a restaurant and tip your waiter 15%, for example, match that tip for yourself! In other words, if you tip the waitress $10, tip your emergency fund $10 as well. It’s a nifty little trick that will help build up the balance in that savings.
- Keep paying debt, but pay it to yourself
If you pay off your vehicle (let’s say you have a car payment that is $200 a month) each month continue to pay that $200…to your emergency fund! Then, if you want to, set a cap on your emergency fund. Let’s say you only want to have $2,000 put away in an emergency fund. And let’s say you currently have $3,500 in there. Take the additional money you are saving and put it towards another debt that you owe. It will help you to be prepared for an emergency and become debt free all in one shot.
- Budget big for groceries, then save the difference
Let’s say you normally spend $350 a month for groceries. Budget $400 for groceries and whatever you don’t spend of that $400, put in your emergency fund. Also, try using coupons and shopping around the best prices in town before you go shopping and always use a shopping list to help you stick to your budget. This might also help you cut down that grocery bill and save more for emergencies.
- Limit your access
It can be a good idea to move some of your emergency funds once you saved a solid amount. For example, once you reach $2,000 you could roll $1,000 of those funds into a True Money Market or Certificate of Deposit account that gives you limited access yet, they yields better dividends than a regular savings account.
- Stash away a bonus or tax refund check
If you earn a Christmas bonus or if you get extra cash back on your taxes, or any other type of windfall, put that directly into the bank! Use it for your emergency fund.
- Refinance
Refinancing your mortgage or auto loan can seem intimidating but it really only takes a little of your time and patience. In the long run it will save you time and money! When you refinance an existing loan at a lower interest rate usually your monthly payments decrease and you save more money over time. If you refinance a loan begin putting the amount of money you are saving into your emergency fund.
- Save on auto insurance
If you take some time to compare rates and prices you could save hundreds of dollars each year on your car insurance. Take the extra amount you would have paid for the insurance and save it! The Credit Union also offers our members a discount on auto insurance. You can call 1-888-380-9287 and mention Key Code 0533 for a free price quote.