Money is tight. You manage to pay your bills and buy groceries for the family, but after that, there is little left over. What happens if the car breaks down or someone gets hurt? Rather than worry about it, you should concentrate on building an emergency fund. No matter what your income level, this is an important thing to do, and quite feasible.
Budget for Long-Term Expenses
Just because an expense does not occur every day or every week does not mean that you cannot anticipate and plan for them. Car and house repairs are excellent examples of these types of expenses. Other examples include seasonal clothing purchases, buying eyeglasses or contacts, and even things like haircuts. For each one of these long-term expenses, ones that happen only after a longer period of time, you can build a monetary fund.
The first thing you have to do is find out how much money you need for each one, and by what date. If you need two hundred dollars for car tires every year, pick a date when you would like to buy them. Then, simply divide the number of paycheck periods you have until you have to buy them by the money they will cost. The result is how much money you have to save every paycheck for that expense.
What is an Emergency?
A teenager may consider an emergency the advent of a new video game. More mature people should realize what true emergencies are. They include things like house fires, flood damage, cars breaking down when you need it to get to work, a debilitating injury or disease diagnosis, or even your mischievous child spilling a gallon of paint on the rug.
Just imagine what would happen in each instance if an emergency fund was not available to help pay for these true emergencies? You could either not pay the money, and suffer through the problem with disastrous results, or go into debt with credit cards and loans.
How Much Do You Need?
One truth of emergency fund building is that you never really know how much you are going to need. It is always better to err on the generous side. It is a general rule of thumb that you should have three to six month’s living expenses secured in a savings account. Surely, this amount will be very helpful if you have an emergency.
The most important thing about building an emergency fund is making sure that it is separate from other savings’ funds that you might be building. If you are saving up for a new car or a new roof for the house, a long-term expense, you should still save up money for unforeseen emergencies as well.
Building an emergency fund should be done no matter what your income level. Is the night out to dinner really more important than being able to buy a new tire when you run over a nail? Is the name brand outfit needed more than money to see you through a broken arm when you can’t work? You must build an emergency fund before emergency hits.
