When planning your monthly budget, it may seem difficult just to make ends meet, let alone save for emergencies. But life is full of unexpected surprises that can leave you stranded financially, such as:
- Medical emergencies not covered by insurance (including pet health emergencies).
- Job loss, such as being laid off or having to quit to care for a sick family member.
- Car expenses like major repairs or having to replace a totaled car after an accident.
- Emergency household repairs that can’t be put off, such as busted pipes or heating units that break during winter.
- Unexpected travel costs such as a plane ticket to attend the funeral of a loved one.
When the unexpected happens, it’s important to have a stash of cash set aside, and that means including a line item in your budget. Otherwise, you could rack up credit card debt to cover these costs, which can derail your financial goals.
A good first goal for your emergency fund is three months of your living expenses. If you pay $2,000 a month to cover the basics (housing, utilities and food), then make it a goal to save $6,000 in your emergency fund. If you have dependents, like children or other relatives who rely on your income, it’s wise to try to set aside double that amount.
If this amount feels overwhelming, start small. Setting aside even a few dollars a week will help build up a reserve over time. Any amount of emergency savings is helpful.
It’s important that emergency funds be accessible. To ensure that you can access the money when you need it without paying a penalty, you’ll want to keep your emergency fund separate from your retirement account. One option is to open a separate savings account.
It’s much easier to build up your savings over time if you make regular deposits into your emergency fund. Some banks allow you to set up an automatic monthly transfer from your checking account so you can stick to your goal. If you have direct deposit through your employer, you could designate a set amount of money from each paycheck for your savings account to build up your savings.
Personal finance expert Suze Orman offers this helpful tip: Give your savings account a very specific name such as My Emergency Fund or My Safety Net. Every time you log on and see the account name it will serve two purposes: You’ll feel great knowing you’re building security, and you’ll be less likely to raid the account for a non-essential expense.
