We’ve all heard the advice – whether it’s from our parents, our accountants, or from a stranger on the Internet. “Start an emergency fund!” they say. “You need to have six months of expenses saved up before you spend money on anything else!”
The amount you’re “supposed” to have saved up may vary, but the advice is always the same. But today, we’re going to delve a little deeper into WHY you should have an emergency fund – and provide you with some simple tips that you can use to help start one.
Why Do I Need An Emergency Fund?
An emergency fund is exactly what it sounds like – savings to help get you through an unexpected problem or life event. And in case you don’t think that such an emergency could happen to you, think again. We’re talking about common, run-of-the-mill problems. The only difference is, that you might not associate financial strife with any of them.
- Medical Emergency
You’ve heard it on the news before. An unemployed, homeless person ends up with a rare terminal illness and racks up millions of dollars in medical bills that can never be repaid. But you don’t have to be unemployed, or even uninsured, to rack up big time medical bills. Depending on the situation, insurance simply might not cover the full cost. From copays and deductibles to bills that exceed your coverage limits, it’s all too common for folks that develop chronic illnesses or several conditions to find themselves underwater in medical debt.
Having an emergency fund can help cover some of these costs and can also encourage you to get treated sooner. If you have money put away for emergencies, you won’t have to decide if you’re “sick enough” for that trip to the ER. Your emergency fund is a safety net that lets you put your health first.
- Home/Car Repairs
When you make the decision to buy a home, you’re not just taking responsibility for a piece of land. You’re taking your livelihood into your hands, because everything in your new house is your responsibility. Having an emergency fund can be a lifesaver (literally) in case the heating system breaks in the dead of winter, whereas otherwise you might just have to make do.
Similarly, if your car breaks down, having an emergency fund can help you get the necessary repairs so that you can keep your life moving and get back on the road.
- Job Loss
Losing your job has an obvious impact on your finances, but it’s important not to underestimate how significant that impact can be. These days, finding a new job – especially nearby and at a comparable salary – can be a big challenge. According to a variety of sources, the average job hunt can take anywhere from six to sixteen weeks! That means you could be unemployed for four months or longer.
Having an emergency fund to help keep you afloat while you find a new gig and get settled can be a huge relief – one that lets you focus on the job search and not on how you’re going to pay the bills tomorrow.
How Do I Get Started?
The idea of having an emergency fund makes sense, and sounds like a nice idea. But how do you start one, especially if you’re already living paycheck to paycheck? Well, here are a few ideas:
Make A Budget
If you don’t already have a budget, make one. Today. It’s impossible to maximize your savings if you don’t know where your money is going, so sit down and chart out your income and fixed expenses (rent/mortgage, insurance, cell phone, car payment, etc.). Then add in variable expenses (groceries, entertainment, travel, etc.). If you’re going into the negative each month, you’ll never get ahead, so be sure to keep the end result positive. And don’t forget to add a line to your budget for deposits to your savings account!
It may seem like a simple idea, but setting aside your change (in a piggy bank or a jar) can add up quickly, especially if you start spending in cash instead of using a credit or debit card. And you won’t miss the money, because it’s just spare change that would end up on the floor of your car or between the couch cushions.
Another idea to start saving money in a painless way is to direct deposit money into a savings account with each paycheck. It doesn’t have to be a ton – start with $5 or $10 and work your way up. If you start low, you won’t miss the money and you won’t be tempted to spend it, because it’ll get deposited in savings automatically. This really takes advantage of the idea of “out of sight, out of mind.”
Picking up a second job, or just taking advantage of one-time income opportunities (temporary or “odd” jobs, offering freelance services, etc.) can really boost your savings since everything you earn is “extra” money.
Sell Some Stuff
You know that closet full of old clothes that don’t fit, old games you don’t play, and old kitchenware you don’t use? If you’re looking for some extra cash, dust off the goods and put them up on eBay or Craigslist to turn them into cash (and free up some space around the house). Or you could go the old-fashioned route and have a yard sale – either way, what better way to make some extra money than to get rid of stuff you aren’t using anyway?
This may seem obvious, and it’s linked to having a budget, but spending less money than you budget is an awesome way to boost your savings fast. Start playing a game with your budget – see if you can cut your entertainment or dining out by $10 this month, and then deposit that $10 into your savings account. Challenge yourself to have friends over and make dinner for less than you would have spent going out.
Trimming your expenses here and there can make a huge difference, and can be a fun way to get yourself in a savings-oriented mindset.