Emergency Funding Basics: How to be Prepared
November 26, 2019
In our last post about emergency funds, we broke down what they are and why everyone should consider having one. But how does one go about building this fund and maintaining it? How long do you need an emergency fund? What types of emergencies is your fund for? These are all great questions to consider as you embark on preparing and sustaining this fund.
As a refresher, an emergency fund is money saved for unanticipated events of difficulty or quick change. Common events that might require emergency money include unemployment, unexpected travel, repairs, medical procedures, or any payment that is outside of your day-to-day that also requires urgent attention.
How do I start building an emergency fund?
Starting an emergency fund can be difficult because it might require you to make adjustments to your original savings plans. It might be a good idea to assess your current spending and saving habits to figure out what amount of money is necessary to build your emergency fund.
Generally, three to six months of finances is the recommended amount of money to have on reserve in your emergency fund. So, for example, if you spend $2,200 per month, you’ll want to consider having a minimum of $6,600 saved in an emergency fund. The final figure for your emergency fund amount can be subject to change based on your individual habits. Utilizing an emergency fund calculator can also help bring more clarity to the amount you may need in your fund.
As you survey your financial plan, look for places you can re-allocate funds to save as emergency money. Some places you might want to make adjustments might include:
- Social money – If you’ve dedicated a portion of your money to eating out, buying coffee, or generally doing things with your friends, family, and/or your significant other, you may want to consider minimizing this fund and putting the excess in your emergency fund.
This isn’t to say you should forgo participating in the things you love for the sake of saving money but small changes could add up to an impressive amount over time. Preparing more meals so you can eat out less may be a good, money-saving option if you rely on restaurants for mealtime.
- Automatic savings – Consider automating your savings so that when payday rolls around, you can focus on the money you have left, not the money you have to try not to spend. In doing this, you can increase your savings and refinance your spending habits.
- Increase your income – This is easier said than done but finding a side hustle is a great option if you’re not interested in changing how you spend but still want to save. Whatever money you make can go directly into your emergency fund.
How long do I need an emergency fund?
Creating an emergency fund can be a long journey since the volume of money an emergency funds account for is quite high. In the event that you no longer see a need for an emergency fund, keeping that money where it is may still be a good idea.
It may be worthwhile to consider your emergency money as an asset that will grow alongside you. If something should change your lifestyle significantly, like having children, you may want to continue furnishing your emergency fund so it covers everyone in your life that may be affected by an emergency in your life or theirs.
Emergency money is often thought of primarily to cover the person who holds the money. However, it is likely that your money could help play a role in saving the day for someone close to you or an expense on the periphery of your life. That’s what makes this fund crucial—the ability to not let finances get in the way of solving your problems.
Your preparation for an emergency fund begins with making small decisions throughout your financial journey. A series of small decisions can add up and help you achieve an emergency fund. Get saving, today!
Your financial success is in your hands
Personal finances don’t have to be complex. With the right tips and diligent efforts, you can make your savings goals come true. Take a look at this guide to meeting your savings goals, today!
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