The Unexpected: Emergency Funds
$400. According to the Fed’s Survey of Household Economics and Decisionmaking, that is the amount of money 40% of Americans can not come up with in an emergency. Picture this, you go to your routine medical exam thinking your insurance covers everything. However, you get handed a $500 bill that you can not afford. A lot of people will place the bill on their credit card with 18% APR or even get a payday loan knowing they have other financial obligations to take care of. In return, the individual spirals into the debt cycle that they can’t seem to get get out of. Although this is an extreme example, this happens everyday and could even happen to you if you are not prepared.
Now I know that stat might have some of you shook, but there is one thing everybody can have in order to help prevent something like this from happening. An emergency fund! An emergency fund is an account for money set aside for those unexpected scenarios including losing your job, medical bills or car repairs. And no, you shouldn’t use your emergency savings for that trip you didn’t budget for or those new pair of Jordans that just dropped the other day.
Many personal finance experts usually suggest having a “standard” 3-6 months worth of expenses saved. Whether you have the “standard” or just $1000, there are a few benefits that come with having a healthy emergency savings:
It creates a cushion for your finances by having additional funds during times of need.
It decreases the likelihood of taking on unnecessary debt. By taking on unnecessary debt, there is a big chance you may fall into the debt cycle.
You can live your best life. You don’t have to cancel your planned trips just because of an unexpected expense.
So where do we start? Rome wasn’t built overnight so don’t drive yourself crazy trying to get 3-6 months worth of expenses saved . It took me almost two years to get my emergency savings to 6 months. First, set a goal to reach $1000 then go from there. Next, in order to help keep yourself accountable do the following two things: use a separate savings (away from your day-to-day bank) dedicated for emergencies and automate the transfers. Doing this will help with temptation and you’ll be saving without lifting a finger.
Now that we know the importance of having an emergency savings, let’s get started! As always, I want to hear from you! Do you currently have an emergency savings? Has an emergency savings helped your finances? Feel free to use the comment section below to join the conversation!
Holding you accountable,
DWM