How to Plan For Unexpected Finances With An Emergency Fund
When dealing with personal finances, there are those who don’t know where to start and those who create a budget down to the last penny. Although it is good practice to budget out your monthly expenses, we do not know when life will suddenly throw you a curveball. From an unexpected rent hike to your car’s engine collapsing, your perfectly managed budget may go up in flames. Even though you cannot predict the unpredictable, you can prepare for them by creating an emergency fund.
When Do You Need An Emergency Fund?
Your emergency fund is not a fund for frivolous expenditures like buying a new entertainment center or a spontaneous vacation. An emergency fund allows us a sense of relief when an emergency pops up, allowing us to continue to pay for non-discretionary expenses.
The following situations are examples of when an emergency fund would be useful:
- Loss or Interruption of Employment
Whether an interruption in your paycheck is due to a change in your job position or job loss, monthly expenses such as rent/mortgage, loans/debts, groceries, utilities, etc., will still need to be paid. Having a fund set aside that is liquid and easily accessible will save you tremendous stress of trying to cover these expenses while you are in limbo.
- Medical bills
Even with health insurance, you may encounter a large deductible or high co-pay. To avoid draining your emergency fund, consider an HSA plan.
- Major Auto Repairs
One of the most inconvenient expenses is automobile repairs. We often heavily rely on cars as our mode of transportation. Although you can plan for regular tune-ups and maintenance, you can’t prepare for accidents or engine failure.
- Home Repairs or Rent Hikes
From a broken furnace to a burst water pipe, home repairs are associated with a hefty price tag. Emergency funds can act as a lifesaver when you need your home to function at full effectiveness as fast as possible. Likewise, when renting, your landlord may raise prices with changes in the market. Be prepared for this scenario, as moving costs can be tough on your wallet as well if you choose to live elsewhere.
How Much Money Should You Set Aside?
Since the 2008 financial crisis, experts recommend creating an emergency fund with enough money to cover at least six months of expenses.
How To Build Your Emergency Fund
After figuring out how much six months of expenses is worth, you may seem less enthused about creating a fund. However, by breaking your emergency fund down into smaller components, it will become more manageable.
Within your monthly expenditures to see if there are any areas where you waste money. When was the last time you looked carefully at your monthly credit card statement? You may find monthly subscriptions in there that you no longer need and can be canceled — the money you would have “wasted” can be directed to your fund. Another way you can build up your emergency fund is setting regularly scheduled payments. Take a small portion of your paycheck and divert it to your emergency fund.
All in all, building an emergency fund will be beneficial to you when life throws unexpected expenses your way.
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