We all like to see ourselves as ants, but let’s face it: most of us are grasshoppers. According to a recent Bankrate survey, 56% of Americans don’t have enough money saved up to cover an unexpected bill of $1,000. With necessities more expensive than ever, it’s easier to be like the grasshopper and think about today instead of tomorrow. But with a clear plan in place, you can have the best of both worlds: enough money to live a good life today and enough to save for tomorrow’s rainy day. Here’s why you need an emergency fund and how to start saving.
Why Emergency Funds Matter
The problem with emergencies is that by definition they’re unpredictable. If you knew you were going to lose your job, that your refrigerator was going to stop working, or that you were going to break your leg, you could save up enough to be ready for it. All you can do is be prepared for any emergency that might arise. With enough money saved, you’ll be ready for anything. Without it, you’ll be dependent on a high-interest loan or credit card that could put you in a financial hole.
What Is An Emergency Fund?
The money in your emergency fund has to have two important qualities: it needs to be sizable and accessible. If you have $100 and you need $1,000, you’re in trouble. If you have $10,000 but it’s invested somewhere you can’t withdraw it quickly, you’re in trouble. Experts say you should have a $500 minimum in your emergency fund, and that it should live in a basic savings account, where it can earn decent interest but be instantly accessible when you need it.
How Much Should You Have in Your Emergency Fund?
$500 is a good starting point for an emergency fund. In the long term, you want to build that fund to at least 6 months of living expenses. That includes housing (rent or mortgage), utilities, food, and insurance. Try to calculate your average monthly expenses, multiply by 6, and that’s the number you’re building toward. It may seem like a lot, but every dollar you save toward that goal amount could end up saving you in the event of an emergency. If you lose your job and only have 3 months of expenses in the bank, you’re still a lot better off than if you had 0 months.
How To Build An Emergency Fund
The best way to grow an emergency fund is to make it automatic so you don’t have to think about it. You can set up a regular transfer from checking to a new savings account, whether it’s $100 a month or $500. Build that amount into your budget, right next to your living expenses and entertainment and saving for retirement. If you don’t have a budget, you may be surprised how much making a budget can organize your financial life. You might find out places you can save more, and put that money towards your emergency fund. If you reach a point where you’ve achieved your goal, you can then direct the same monthly amount to another priority.
If you need to open a savings account for your emergency fund, the experts at Equity Bank can help. We can work with you on everything from basic budgeting to financial planning, and help keep you and your family secure and prosperous for the long term. Get in touch with us today!