Accidents and natural disasters happen. In an instance, your life can be turned upside down. Nothing illustrates that better than the recent tornadoes that ripped through the southern United States, flattening entire towns and killing hundreds of people. Survivors now have to begin the process of rebuilding their lives, often starting over again with nothing.
Are you financially prepared for the unexpected – a job loss, a debilitating illness or an accident that keeps you from working for months, a natural disaster? If you’re not, now is the best time to start preparing for what you will do in case of an emergency and to begin the process of building your emergency fund now.
Experts generally recommend having a minimum of six months worth of expenses in your emergency fund. Sit down and make a list of all of the expenses you incur each month, including mortgage or rent, utilities, car payments, credit cards, student and other loans, medical expenses, and insurance costs to determine how much you typically have in monthly expenses. Multiply that number by six to get your minimum amount for your emergency fund.
Do you have that saved? Or, do you need to start saving?
Saving money can often seem intimidating, but you can and should do it. A lot of Americans aren’t. In fact, according to MSN Money, a mere 40 percent of all adults in the United States have separate bank accounts allotted for emergencies. That means more than half of us are not prepared for a financial crisis.
Many experts recommend focusing on your emergency fund first. That means putting paying off your consumer debt on the backburner. Pay the minimums each month while you build your emergency fund. Once you’ve got your six months of expenses, start focusing on paying off your debt. An emergency fund is that important.
Step One: Open a separate savings account
Open a separate savings account, one that earns you interest, for your emergency fund. If you use your regular account, you’re much more likely to dip into it, promising to repay yourself later. Do not get an ATM card or a credit card with your emergency fund account. Remember, your goal is to let that money sit – until you have a true emergency.
Step Two: Set a budget
If you don’t already have a budget, set one. Find ways to cut costs. Turn off the landline and use only your cell phone. Brown bag it for lunch. Rent a movie instead of going to the movies. Find places where you can reasonably cut your budget, and put the money you save from taking your lunch to work instead of going out to lunch every day in your emergency fund account.
Maybe you have an extra car that is costing you an arm and a leg each month. Can you conceivably sell that car to free up the extra cash for your emergency fund? Or, maybe you are driving the latest model car, but it’s costing you a fortune each month. Consider trading it in for a used or a less expensive, new model.
Step Three: Do not run up your debt
While you’re funneling your extra cash into your emergency fund, do not run up your debt. Avoid using credit cards as much as you can so you can avoid driving up both your total payoff amount and your monthly payment.
Saving for an emergency fund, especially if you’re struggling financially to begin with, can be a daunting prospect. But, it’s doable if you do the basics (which are very similar to how to pay down your debt): Open a separate account and do not touch it unless you have a true emergency; set and adhere to a budget, using the money you’ve saved for your emergency fund; and avoid running up any more debt.
George Gallagher is a personal finance and education blogger. He currently helps students find private student loans to help them afford the costs of college.