We’ve all heard it’s smart to have money set aside in an emergency fund, but what does that mean exactly?
Let’s start by describing a financial emergency.
This is an unexpected situation that has an impact on your normal income or expenses. Some of the most common financial emergencies include:
- Job loss or reduced hours
- Sudden health problem that affects your ability to work
- Medical bills
- Natural disaster
- Death of a spouse
- Significant home repair
- Major car issue like a transmission or suspension problem
We typically don’t include anticipated expenses in the category of financial emergencies. Although replacing your home’s furnace or car’s tires can be expensive, you can anticipate these costs based on the item’s age and typical life span. These replacements should ideally be covered by your general savings and not pulled from your emergency fund.
How much do I need?
Experts typically recommend building an emergency fund that contains enough money to cover 3-6 months of essential expenses. We know that sounds overwhelming, so we’ve broken it down into six steps that will put you on the path to a well-funded emergency account:
- Know your numbers. Start by identifying (or confirming) how much your necessary monthly expenses are (include rent or mortgage, utilities, insurance, car payments, food, etc.) and exclude those things you can’t do without if needed (dinners out, green fees, fashion splurges, etc.).
- Set your goal(s). Multiply the above number by three to determine the minimum amount you should have available and by six to establish your higher-end goal. This emergency fund should be easily accessible (commonly used accounts include savings, checking and money market).
- Choose a winning mindset. Although it might seem like a bummer to eliminate a few fun expenses, remind yourself that this will make life easier when an emergency comes up. It can be a big relief to not have financial worries while dealing with an illness, household disaster or job loss.
- Identify areas where you can save. We recently posted an article that shares tips on how to turn expenses into savings. Check it out here!
- Be realistic and reward yourself. Give yourself a reasonable timeframe, as well as a do-able savings amount. You can also reward yourself as you hit certain targets – whether that’s an ice cream date or a non-monetary reward like taking a nap while your kids do the dishes.
- Recognize the role of insurance. In addition to the importance of having an emergency fund with enough money for 3-6 months of expenses, your local COUNTRY Financial representative can help you protect your lifestyle with well-chosen insurance.
You’ll be amazed at the sense of confidence it gives you to have an emergency fund available! And wouldn’t we all like to have one less thing to worry about?