Who doesn’t want to live the great American dream? It is a dream of living comfortably without financial woes, of having a home and possible rental property, of having enough income, and of generally living a comfortable life.
But what if this comfortable life is suddenly hit by unexpected emergencies? Even if you are living the American dream today, are you ready for tomorrow? Emergencies and unexpected needs arise without warning. Unexpected events like disasters, sickness, and even the simple unfortunate events, like your car breaking down, can devastate or at least hurt your financial state.
A reliable emergency fund is just what you need to avert the damaging effects of sudden financial needs.
What Constitutes an Emergency?
Emergencies that may cause you to break your piggy bank are those urgent needs that will affect your general well being if left unattended. Emergencies can include accidents, sickness, and more. Emergencies do not include the sudden need to buy a sports car or the urge to go on a Caribbean cruise.
Sudden calamities like floods, hurricanes, and earthquakes that devastate your well being are considered legit emergencies. Having to fix a broken refrigerator or car might also count as a minor emergency. A medical emergency is another type of emergency that can sap your bank account. If you do not have an emergency fund ready when these emergencies occur, you may have to get a loan or you may rely on your credit card, which can cause problems in the long run as the money charged accrues interest.
How to Set Up a Reliable Emergency Fund
Experts say that the minimum amount that you need in your emergency fund is equal to three to six months of expenses. To compute this, you need to find your total monthly expenses then multiply it by six. The result is then the minimum amount you need to save.
Guidelines for Setting up an Emergency Fund
- Emergency expenses are often urgent needs therefore your emergency fund should be accessible or easy to liquidate. You can place your emergency fund in a savings account. If you want to place it in a long term account with higher interest rate, you can do that too. You just need to be sure that you have another account where you can easily withdraw your money to cover sudden expenses.
- Calculate how much money you can afford to allocate each month to building your emergency fund. This is based on the income you have minus your expenses and monthly payments for debts. You may also deduct entertainment expenses.
- Find sources in your finances where you can obtain extra money. Cutting out unnecessary expenses and saving your spare change can be a good source of extra money that you can add to your emergency fund.
- Create another source of income. One reliable and convenient source of extra income these days are passive incomes. These are sources of income that you do not put much of your time on. Examples are rentals and online affiliate programs.
- Another important matter you need to remember in building your emergency fund is not to be tempted on spending it on non-urgent needs. Use the fund for legitimate emergencies only.
In life, there are no guarantees, only the ability to be ready. Do not let the good life you are having right now stop you from being ready for whatever the future may bring. Unexpected emergencies may occur, but it will be less devastating if you are financially prepared to handle it. So, whatever circumstances the future may bring, just remember that it is always better to be safe than sorry.
When an emergency strikes, will you be financial ready? Do you have an emergency fund? What did you do to build it up?
Dominique Brown is a financial planner, landord, personal finance blogger and video blogger. He is the owner of YourFinancesSimplified.com where he talks about everything from being a new father to his worst financial mistakes. He has been featured on The Huffington Post and H&R Block. You can find him either on Twitter, Facebook, Youtube or Instagram.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.