One of the biggest fears held by many is to be without an income, which brings about the inability to pay bills. To prevent this from happening to you, it’s important to have an emergency fund, which will help ensure your financial security in the event life throws something unexpected your way.
What is an Emergency Fund?
An emergency fund is money set aside to cover unexpected life events. Think of it as a financial safety net that can help prevent additional debt and stress. Your emergency fund is important to help you cover healthcare expenses or to prevent financial hardship due to home or auto repairs, theft, or job loss. Your emergency fund should be separate from your checking or savings account to prevent you from dipping into it for normal expenses. Avoid accounts that tack on a penalty for withdrawing the money before the account matures, like a Certificate of Deposit (CD). Instead, make sure you can easily access your funds in a liquid account like a normal savings or a Money Market account.
Using your Emergency Fund
It’s in the name! The emergency fund is for emergencies only. It’s not a savings account to use for vacations, pay off credit card debt, or to purchase something you want. Some things that may require you to dip into your fund are:
- Medical emergencies where health insurance may not cover you or a loved one fully
- Loss of a job or income that may prevent you from covering your bills
- Travel expenses if a loved one passes away or falls ill
- Unexpected and necessary repairs of your home or car
Saving for your Fund
Most experts advise having enough money saved to cover at least six months of expenses with a little bit of cushion. When determining the amount of money you should keep in your emergency fund, calculate how much you need to live comfortably each month. Start with your take-home pay and subtract all your monthly expenses from it. Include what you pay for housing, utilities, bills, food, and other necessary expenses. Then determine your goal: how many months of savings you want to have. Once you know your goal, you can look at your finances to see how much you can contribute to your emergency fund each month and determine how long it will take to fund the account. To begin saving, try to contribute either a percentage of your leftover budget or a set amount from every paycheck. Direct deposit is a great tool, because you never see the money, removing the temptation to spend it!
Saving Faster
Bulking up your emergency fund can be a slow process, but there are ways to speed up your saving so you can meet your goal faster. Here are a few tips:
- We know how tempting extra spending money can be, but saving the money you receive from bonuses, gifts, or tax refunds is helpful to move your fund forward.
- Boost your income by starting a side hustle that utilizes your skills and passions, or try selling items you no longer use.
- Whenever you feel like making an impulsive purchase, put the money aside. If you still want to buy the item after 30 days, do it. If not, put the money into your emergency fund.
- Reduce the amount you spend on takeout, monthly subscriptions, or shopping habits by cutting them out or utilizing coupons and resale stores.
- Contact us for a quote on refinancing your home, car or other debts. Often times this can save additional money each month that can be placed directly into your emergency fund.
- Reach out to Michigan First Insurance Agency to see if you can lower your home, auto, life or other insurance premiums.
Cutting back on your expenses and boosting your income work hand-in-hand to get you to your goal faster.
After You’ve Saved
Once you reach the goal you set and feel comfortable with the amount you have in your emergency fund, start addressing some of your other financial goals by opening a new savings or investment account. Do you dream of owning a house or buying a new car? What about that home renovation you’ve always wanted? Have you planned for retirement? If you have questions about how to achieve your financial goals, ask the experts! Michigan First Wealth Management Group can help you accomplish your goals by ensuring your money is invested wisely. Be proud of your accomplishments! Now that you’re prepared for an emergency it’s time to plan the future you dream of.