Building Your Emergency Fund: A Guide to Getting Started
I am sure that you have heard the term Emergency Funds recently. In the last few years, it is often talked about that you should have 3-6 months of savings in an Emergency Fund. What is the purpose of this savings and how do you get started?
An Emergency Fund is exactly what it sounds like. It is a separate savings account that you use in case of emergencies. This is not emergencies like needing a new book or your hiking boots are a bit worn and need a replacement (Captain Boy Scout has done this!). Emergency Funds are for something catastrophic. For Example:
You have lost your job
You have a medical crisis
You have been in an accident
I know that many of us think that it won’t happen to us. We are all human though, bad things happen, just as good things do. Sometimes these events can make us struggle. Maybe you don’t lose your job but with an accident, you will be out of work for 2-3 months. You might be getting some sort of disability but did you know that disability usually only covers 60-70% of your wages, at most.
It is not the best plan to make but the truth is, after something happens it’s too late. And maybe 3 months of savings to cover your bills isn’t enough but it is something to help you get through the beginning of your process. In an emergency, having time to get things in order is a gift to yourself at a hard time.
So how do you get started on an Emergency Fund? It requires time and a lot of discipline for many of us
Set your goal. Think through what you need each month. Mortgage/rent, auto loans, insurance, power bills, minimum payments on loans, food, gas. Threse things are pretty non-negotiable. If you have coverage on your loans (life, disability, unemployment), this *may* cover those. That can be a big help.
One of the things that I did in starting a fund was to know what my overall goal is but to set myself manageable goals. For instance, if I wanted to save $3,000, that is a big goal. I started with $100. When I got there, I set a new goal of $500, then $1,000. It may seem s bit crazy but studies do show that smaller, more measurable goals are more attainable.
Next, evaluate your “discretionary” spending. This is the non-essential stuff. Streaming services, dining out, Dunkin’ runs, etc. You stream Netflix, Max, Peacock, Paramount, Hulu and Disney. Is there a bundle for any of these that will save money? (hint, yes, there is). Does your cell phone service offer any streaming as part of your plan? (most do!) Are you really watching them all enough so that you have to pay for them every month? You can turn these services on and off. Dunkin’ costs $6 a day. K-Cups are cheaper than that for home or, even better, is there coffee in the breakroom at work and you can bring in any flavoring you might like?
Some of us still enjoy cash. If you do. Save your change. Save your $1 bills. When you are running by the Credit Union, deposit them into your Emergency Fund. Sure, it may only be $5 here or there but it will add up. No one expects you to reach your goal in a day, you shouldn’t expect it either. It takes time. Small amounts add up.
Some do live paycheck to paycheck and that makes even thinking about savings difficult. Set up automatic deposits to this account. Within a week or 2, you won’t notice it missing. $5, $10, $25. It will all add up. Every dollar is one less that you have to worry about. If you can’t set it up through your payroll, set it up through your home banking app. If you get a raise, increase your contribution, again, another $5, $10 or $25. When you get to one of your goals, you will feel real pride.
So what counts as an “Emergency”?
You lose your job or have a sudden loss in pay
An unexpected medical bill
Emergency car or home repairs
The whole purpose of this account is to use it when you have an emergency. Don’t beat yourself up when you have to take from it. Just remember to replace the funds that you take out.
Remember though that this is not an account to “borrow” from and put back. This is specifically for tough, dire times when something big and expensive comes up. Not when you want a trip to Jamaica!
If you have any questions or need help getting started, reach out to one of Ancorum Credit Unions Certified Financial Counselors. We are here for questions and other help!