Emergency Funds Why are They Needed?
Emergency Funds – Think back to the last time you needed more cash than you had. How did that feel? Were you a little (or a lot) panicked? How do You Start an Emergency Fund?
According to Business Insider, most of us have the same two big money fears: that we spend too much and save too little. Most people also say they know they should be doing exactly the opposite. However, it can feel impossible to switch the pattern around.
The modern Western mentality also struggles with impatience. A little is too little, and only a lot right now is good enough. This mentality is the big enemy of the effort to save. In this article, we will address the why, how and how much of starting your emergency fund.
Why do you need an emergency fund?
A better question might be “why wouldn’t you need an emergency fund?” No matter how carefully you plan for the future, life always has a few wildcards. As well, as soon as you start a family, all financial bets sometimes seem like they fly right out the window! Common money mistakes of people in their twenties are not having emergency funds.
But there are also greater forces at work that could impact your finances in ways you couldn’t begin to control. Examples include the global political landscape, the weather, your loved ones’ health and the national economy.
The moral of this exercise for most people tends to be: it is never a bad idea to sock away a bit of extra cash in savings.
How do You Start an Emergency Fund?
The one good and cool thing about emergency funds is this – they can be fun! This is part of the psychology behind why games are so popular. We keep score, watch the points add up, feel that adrenaline rush when we win. Fun, right?
This holds true whether you are playing against yourself or someone else. An emergency fund can be like a game in this respect. If you like to do things in groups, ask a few of your friends to join in with you. Each week, you can set new goals and compare your progress. This also can help with accountability.
But you can also easily create your own motivation. Some people like to keep wall charts or graphs. Others prefer to allow themselves to spend a little after they’ve saved up to certain benchmarks.
So first, identify your umbrella goal. Next, decide what your motivation will be daily and weekly – how will you track and celebrate your progress?
Simple Ways to Save Money to Make Emergency Funds Grow
Once you have those two aspects figured out, Nerd Wallet offers these simple ideas you can implement right away to get started saving towards your emergency fund goals:
– Collect all the spare change you can find. Go to the bank and get some change rolls. Count up what you have, roll it up and deposit it into your savings account.
– Collect $1 & $5 bills. When your collection outgrows the box you store it in, count it up and deposit it into your savings account.
– Set up a regular bank auto draft. First, link your checking and saving accounts. Next, decide if you want to draft to your savings account daily, weekly or monthly. Finally, set the amount of the auto draft.
– Use an app like Digit to help you save. Digit uses its own in-house algorithm to withdraw small amounts based on your spending patterns. The app holds what it withdraws for you in savings until you ask for withdrawal.
– Sell what you don’t need or use. eBay, Amazon, Craig’s List and even the old-fashioned garage sale are all great ways to jump-start your emergency fund.
How much money should be in emergency funds?
First, you need to recruit your mind to your cause by convincing it that a little savings can add up to a lot of savings. Here is an example:
Save and Invest points out that if you decided to put $20 into your emergency fund each week, you would save over $1,000 in one year. Not bad!
If you don’t think you can afford $20 a week, or if weekly savings sounds too daunting, start with a monthly savings goal.
But here, many people honestly don’t know what they can save, and if this describes you, your first step is to back up and look at your monthly budget (expenses and income). Taking the time to chart out what you spend and what you earn is a real education! You will notice where you can cut back to fuel your emergency fund savings goal.
Often the first question new savers have “what should my emergency fund goal be?” Financial experts advise savings aiming to save enough to have three to six months of fixed living expenses. Fixed living expenses can include these types of expenses: rent/mortgage, cellular service, utilities, car note, car insurance, groceries.
So if your budget tells you that you need $2,500 for basic fixed expenses each month, that is where you start. Multiply $2,500 by 3 to get your 3-month savings goal: $7,500. Then multiply $7,500 by 2 to get your 6-month savings goal: $15,000.
What is a Real Emergency???
Look up the word “emergency” and you will see descriptive terms like “dangerous,” “expected, “serious” and similar others.
But sometimes it is easier to figure out what an emergency truly is by realizing what it is not. Not having cable television service, while irritating, is not an actual emergency. Not taking a vacation every year is not an emergency. Also, not having the latest technology is not an emergency.
Conversely, a flooded-out car or home is an emergency. Having no air conditioning in 100-degree heat is an emergency. A sick child is an emergency.
Where do I put my emergency fund?
Here, Money Crashers emphasizes keeping your emergency fund savings “highly liquid.”
This means you should put these funds in a place where you can access them quickly. “Quickly” means within 24 to 48 hours, if not sooner.
The very best way to keep your funds liquid is to put them in a savings account. Specifically, you want to choose a savings account that allows immediate, same-day withdrawals with no holds.
Starting an emergency fund may sound daunting at first, but once you get going, you may just discover you love it! You feel more secure, stronger, safer, more responsible and educated about your finances. Best of all, you don’t have to worry if you need money in a hurry.