Do You Have Enough For Emergencies?

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You slide into the front seat of your car and put the key into the ignition. You turn the key, and you hear the engine sputter. You try again, and it still won’t start — your engine is stalled. You need to get a tow truck to bring your car to a mechanic for repairs.

You finish washing the last dish after dinner. You pull the plug from the kitchen sink to let the soapy water go down the drain, but the water doesn’t disappear. The kitchen sink is clogged. You need to call a plumbing company to come over and clear the drain.

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Your dog burrowed into your garbage can when you weren’t paying attention and ate something strange. They’re getting sick, and you’re starting to panic. You need to rush them to a veterinary clinic for treatment right away.

These are just some examples of emergency expenses that can surface out of the blue. Are you financially prepared to handle them?

Americans And Emergency Savings

A small emergency expense, like a car repair or veterinary visit, can cause considerable financial trouble for a lot of Americans. According to research from the Federal Reserve, only 68% of adults could cover a hypothetical expense of $400 using cash or an equivalent — this includes personal savings or credit that can be paid off by the next statement.

The remaining 32% of adults could not handle the expense. They responded to the survey by stating they would have to borrow funds or sell something in order to cover the expense — or worse, they would do nothing at all. This means that over a quarter of respondents would be put into a difficult financial situation over $400.

If you’re one of the 32% of adults who can’t handle a $400 expense, you need to start setting aside savings to avoid jumping into financial instability. Even if you’re one of the 68% that can manage the small expense, you should add to your stash of personal savings — after all, there are plenty of emergencies that cost more than $400 to resolve. You need to build an emergency fund.

What Is An Emergency Fund?

An emergency fund is a reserve of personal savings specifically meant for unplanned, urgent expenses. The moment that an unplanned, urgent expense crops up, you can withdraw the necessary savings from your emergency fund and pay for it. Withdrawing from your savings should have no impact on your monthly budget. You should still be able to cover essentials like your mortgage payments and your utility bills as normal.

You can also use an emergency fund to cover budgetary expenses in times of financial instability. Many Americans had to depend on their emergency funds during the COVID-19 pandemic because they lost their jobs or had their regular hours cut. They used their savings to supplement their incomes and pay for essentials until they got back on their feet — or at the very least, received financial aid from the government.

How Can You Start an Emergency Fund?

Start a Budget

The first thing you need to do is to put together a personal budget. If you split expenses with a housemate or partner, then you should put together a household budget with them.

When you’re building your new budget, determine how much money you can safely put toward your emergency fund every month. If the amount you can afford to dedicate to these savings seems too low, try to shrink or eliminate some variable expenses to increase the size of your contributions.

What variable expenses should you shrink? One of the best personal budgeting tips for beginners is to get control over your food spending. You can shrink this variable expense by using coupons when you go grocery shopping, bringing homemade lunches to work and minimizing your takeout orders. These simple habits will give you plenty of savings for your emergency fund.

Another example of a variable expense you can shrink is transportation. For instance, if you pay for taxis or rideshare services (Uber, LYFT, etc.) on a regular basis, you can save money by using public transportation to get around instead. A bus ticket will cost a lot less than any ride you order through an app.

Open an Account

The next step is to open a savings account to store your emergency fund. Don’t put it into an existing savings account that already has an alternative purpose (for example, a college savings fund). It will be easier to track and grow your emergency savings when they’re isolated.

Ideally, you should store your emergency fund inside of a high-yield savings account. A high-yield savings account has a higher interest rate than a standard savings account, which should help the contents of your fund automatically grow over time.

High-yield savings accounts often come with a minimum balance requirement. If your account balance goes below that minimum, you may collect fees until you cross that threshold. Going below the minimum might also invalidate the account’s interest rate. You should only sign on for this account when you’re confident you can meet these requirements.

Automate Contributions

Finally, you should automate your emergency fund contributions. Set automatic transfers between your checking account and savings account. With this small step, you can guarantee that you never forget to deposit your budgeted savings into your emergency fund. It will continue to grow every month.

How Much Should You Save?

At first, you should try to save between $1000-$2000 inside your emergency fund. This should help you cover small emergency expenses, like car repairs and home repairs, immediately. After saving this much, you can finally join the 68% of American adults who can handle a $400 emergency expense without borrowing funds or selling something. That should provide a modest amount of relief.

Don’t stop adding savings to your emergency fund after hitting that goal. Many financial experts recommend that you save between three to six months of expenses inside your fund. This substantial amount of savings should help you supplement your income in times of financial instability. If you lose your job, cut your hours or become too sick to work, you can use your emergency fund to cover your usual expenses for several months.

Are There Alternatives?

An emergency fund is the best way to manage unplanned, urgent expenses. Since it’s composed of your own savings, you don’t have to jump through any hoops to make withdrawals, and you don’t have to follow a repayment plan.

However, you should have some alternative safety nets to help you cover expenses when your emergency fund is shallow. A credit card can be a strong safety net, as long as the current balance is nowhere near the set limit. You could charge the emergency expense to your credit card right away and then steadily pay down the balance later.

A personal line of credit is another alternative that you could use for emergencies. Request a withdrawal within your credit limit. If that request is approved, use the borrowed funds to cover the urgent expense. Afterward, you can focus on making repayments and replenishing your line of credit’s balance.

You should have at least one safety net set up for emergencies. Without a safety net, a single $400 expense could send you into a panic.