You’ve probably heard of Emergency Funds, but aren’t totally clear about it. Am I right? Are you thinking about whether you should start an Emergency Fund? And how to start one if you’ve no money?
By the end of this post, you’ll be armed with not just the knowledge, but also the how-to with getting started on your Emergency Fund and make it work! And work well.
First, some sobering facts about fellow Americans.
A 2017 GOBankingRates survey found that more than half of Americans don’t have enough savings to cover financial emergencies.
Should there be a layoff, 38% would merely have less than $1000. And nearly 23% have less than $100 set aside for emergencies like car repairs.
If you are in the same boat, you MUST take action now and start your emergency fund as soon as possible. The sooner you start, the earlier you’ll improve your financial situation.
What is an Emergency Fund?
Simply put, it’s a sum of money set aside for unexpected emergency spending.
Why have an Emergency Fund? How can an Emergency Fund help you?
#1. We all need an emergency fund to pay for unexpected expenses. The reason? Our monthly earnings usually get depleted by our day-to-day living costs.
#2. With rising inflation, it’s even more important to have an emergency fund. Inflation means that unexpected costs tend to be more as time passes.
#3. Knowing that we can foot unforeseen bills gives us peace of mind. We don’t have to worry about how to foot any bills that can come out of the blue.
If you don’t have an emergency fund, start building one up ASAP.
I’ve my credit cards. Do I still need an emergency fund?
Sure, some folks may think their credit card is their source of funding for emergencies.
But the danger is that using credit to pay for bills that appear without warning will throw you further into debt. Especially if you’ve been struggling to pay off your credit card bills every month.
You’ll also end up be paying more in the end because of interest rate charges.
How much should I have in my emergency fund?
Most experts agree you need an amount that can cover 3 to 6 months of your living expenses.
The amount you need for living expenses really depends on your needs. But of course if your usual income drops for some reason, you can also trim back your usual expenses to stretch your emergency dollars further.
Suze Orman recommends an 8-month emergency fund. That’s because this is how long an ordinary job seeker takes to find a job.
When should I use your emergency fund?
You should only use it for emergencies like unexpected medical costs, car repairs, home repairs or layoffs.
Where should I keep my emergency Fund?
#1. Keep your emergency funds in high yielding bank accounts.
In our case, we put ours in an account that has a higher interest rate. The only catch is any withdrawal on our part will cause the interest rate to fall. But hey, emergencies don’t happen often for most folks, thankfully!
#2. You can also choose to place your emergency funds into certificates of deposit (CDs).
It’s well and good if you don’t need to use that money. However, if you need to withdraw out, you risk forfeiting the higher interest rate.
Another point you’ll have to consider is that you have formally made an agreement with the bank to invest a certain sum for a period of time.
What happened to ours?
When we wanted to withdraw our money earlier than the maturity date, we discovered that our bank has the legal right to release our money a month later, coupled with a hefty penalty. We only received a tiny fraction of the original interest rate.
What can you learn from our story?
The bank is under no obligation to release your money. Do bear this in mind if you’re thinking of putting your money into CDs. Make sure your bank doesn’t have terms and conditions that disadvantage you in case you need your money urgently.
A further point is …
But don’t just assume that’s that. Even with terms and conditions, banks may be sympathetic if your reason for withdrawing (partial or total) is genuine and involves an emergency.
I’ve no money. How to start saving for an emergency fund?
#1. Make a concrete start
Pencil in a date and time.
Make an appointment with yourself.
Better yet, do it together with a support person. Don’t think too much. Our human weakness is to postpone doing something seen as unpleasant.
When you take action and make a start, you soon find yourself on the road to greater financial security.
#2. Contribute to your fund regularly, but adjust as required
Decide how much you can save each month. You can vary this amount. If you know there’re hefty bills coming up, you can choose to save a smaller amount.
This is what we do.
Personally, I find it hard to automate all our bills as one-off bills arrive at different times of the year. We’ll set aside bigger amounts in our checking account to handle these huge bills.
We only automate 3 sets of $20 to be put into our individual savings account every month as there’re three of us.
We don’t want this amount to be so big as to impact us too much. The good thing is we’re still saving automatically even though this is a smaller amount.
Doing a manual transfer into our savings account each month gets us into the habit of saving regularly.
In this way, we also keep track of how much we’re saving each month. This is a good way to motivate yourself too, as you can see how much your savings are adding up.
#3. Save up all your change and channel it into your emergency fund
Many folks underestimate the power of loose change.
There have been many times in the past when loose change in our household came to our rescue. You can keep your loose change in a special jar labelled “Emergency Fund”.
If this method isn’t your preference, sign up for Acorns where it’ll round up any loose change electronically and invest it for you.
I believe this is a great service and I wouldn’t have noticed the tiny sum usually amounting to cents being invested.
You only pay a small fee for this service. I would have signed for this app, but alas it’s not available in my location.
More about Acorns
Acorns is Securities Investor Protection Corporation (SIPC) insured for up to $500,000. if it were close, you’ll be covered to a maximum of $500,000.
According to Acorns, it is a micro-investing account- “Every dollar you invest is automatically diversified over 7,000 stocks stock and bonds. You can select between different portfolios-from conservative to moderately conservative right across to aggressive.”
No clue as to how to invest?
Acorns also has advisors to help you with investing your money.
More than 4 million people have joined Acorns with one billion dollars invested. I can’t think of a better app that helps you save and invest your money.
When you sign up with Acorns with my link, you get a free bonus of $5.
#4. Slash unnecessary spending and save more for a rainy day.
Focus on putting more money into your emergency fund.
By cutting your spending.
Think of the frills you can do without.
Do you really need that extra pair of shoes? Must you really buy that swanky jacket?
Shop at thrift shops to save heaps. Eat out less – save more and prepare healthier food yourself.
#5. Make some extra money on the side to boost your emergency fund.
It’s not going to earn you millions, but you do get paid to do things that you already do online anyway.
If you like earning extra pocket money, learn more about Swagbucks here.
#6. Tax Refunds
Find out if you’re entitled to tax refunds. If you do, pop your refund into your emergency fund. Don’t spend it!
Good Money Sense has 6 clever techniques to build an emergency fund fast, including a bonus tip.
I hope you’ve found these tips useful to setting up your Emergency Fund. My final tip? I urge you to start one NOW. You owe it to yourself.
Share this to help others. Thanks so much!
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