No finance-related New Year’s resolution would be complete without including an emergency fund.
Most experts agree that you should set aside enough money to cover at least three to six months-worth of living expenses, in the event that the “worst” happens (you lose your job, you’re saddled with unexpected medical expenses – you name a disaster, and it could happen).
While setting aside a personal emergency fund is common financial advice, it’s (unfortunately) not common practice. In fact, Bankrate.com found that 49 percent of Americans haven’t saved enough money to cover the bare minimum – three months of expenses in the event of a disaster.
Alarmingly, only a quarter of Americans surveyed had saved enough money to cover six months of expenses.
While what you need in your emergency fund can differ drastically from what your neighbor should have, there are some general considerations that apply, regardless of if you’re a single person with no debt or a family of five with a mortgage, credit cards to pay off and school fees.
So, how much do you need? Calculate your monthly expenses (basic needs, student loans, car payments, etc.). As scary as it may sound from the outset, multiply those expenses by three or six – as the general rule of thumb is to have enough money to cover what you’ll need to survive for three months to half a year. To make this resolution seem a lot more manageable (after all, we recognize that many people are having a hard time just getting by month to month) start even smaller than that. Even aiming to save $1,000 is better than not developing an emergency fund at all. Plus, by “aiming low” you also take into account those pesky unexpected expenses that are bound to creep up over the course of a year – that car repair, braces or new eyeglasses, etc. etc.
Where will you save it? This is trickier than it seems. You want to keep this fund in a place where it’s accessible enough for you to tap into it as the need arises; however, you don’t want it so accessible that you’ll be tempted to withdraw from it for non-essential items – everyday needs or that gadget you really don’t need. Check out Centennial Bank’s savings account options.
How should you approach it? Consider setting up an automatic transfer deposit from your paycheck or primary bank account on a weekly or monthly basis to feed your emergency fund. Think of this as paying yourself first. Remember, “out of sight, out of mind.” Our convenient Bill Pay system allows you to set up recurring transfers. If you are not sure how to, contact our friendly helpdesk.
How should I start? Short answer: “small.” Start wherever you can. Consider that $10 a week – just two or three fancy coffees – comes out to more than $500 a year. Saving for your emergency fund doesn’t seem so daunting when you also consider that, over the course of the year, you may get a tax refund, or perhaps a work bonus. Put all that money toward your emergency fund.
What expenses can I cut? Reduce your existing expenses, and then take what you saved and put it in your fund. For example, consider reducing your cable plan. Skip the pricey latte and brew coffee at home at least once a week. Renegotiate your auto insurance terms. Or, start packing your lunch instead of eating out every day.
While getting financially fit ranks right up there with physical fitness as the top New Year’s resolutions, set yourself up for success and resolve to “do it right” by acknowledging the need for a special fund for emergencies.
Start small so you don’t give up on what seems a daunting goal by the time spring rolls around.