Saving for an Emergency
An Emergency fund creates a financial buffer that can keep you afloat at a time in need without relying on credit cards or high interest loans. It may be especially important to have an emergency fund if you have debts, as this can help you avoid loans, higher credit card use, and avoid accumulating bigger debt.
What is an emergency fund?
An emergency fund is a savings account with money set aside to pay for large, unexpected expenses, and any financial emergencies such as:
- Unforeseen medical expenses.
- Home-appliance repair or replacement.
- Major car fixes.
How much money should you have saved for emergencies?
The right amount of savings for emergency can be found by analyzing your fixed monthly expenses. In case of emergency, you will typically need to cover three to six months’ worth of living expenses. In case you do lose your job, you could use the money to pay for necessities while you find new employment. Or it can help you supplement your unemployment benefits if you do qualify. The amount of money you need for your emergency saving is a goal you should plan to reach as soon as possible, but do not leave out your long term goals aside to build your emergency fund.
Where should you save for your emergency fund?
You should build an emergency fund on a savings account with a high interest rate and easy access. Money market accounts can also be suitable if they provide quick and easy access. Since an emergency can strike at any time, having quick access is essential.
Some people prefer to have it separate from their bank account so as not to be tempted to touch, but here at Prosperity Leaders; we believe in discipline. You should be able to build the discipline that if someone leaves money in the table; you do not touch it because it’s not yours. The same with your emergency fund; whether you save it on an account, a safe, a mattress bank, or piggy bank; have the discipline to not touch it.
What is the best way to start building my emergency fund?
There are many strategies and plans to start building your emergency fund, but none is the best for every person. At Prosperity Leaders we believe that what everybody should follow is the right way not the best. The right way, and the right plan will consider your current financial situation; your financial habits, and your financial goals and objectives.
The right way to start building your emergency fund is by saving 10% or 25% of your discretionary income. Your discretionary income is the result of your Gross Income – Taxes – Fixed Expenses. Discretionary income is the money left to managed at your discretion. It could potentially be the amount you can use to save and invest.
Keeping extra cash for a real emergency and labeling your savings “emergency money” is a great way to maintain your emergency savings safe from overspending.
As financial experts we recommend that once you get started with building your emergency plan; make sure you have written your own personal rules on how you will use and maintain your savings fund. For example, making a list of waht you will consider and what will not be consider an emergency. Are medical emergencies be a cause to use your saving fund? -Most likely, but how about if a friend needs to borrow $500 ? will that be a reason for using your savings account? Make sure you have written this rules ahead of time.
Start your emergency savings fund today:
It may make total sense to start saving for an emergency at your current financial institution or your bank. If you want to explore other options however, contact a Prosperity Leader coach to help you review your options.
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