Are you prepared in case of an emergency? As you are saving money, you might want to consider this additional account. Here are some great tips to get you started today!
Life rarely goes as planned. That’s why it’s always good to have an emergency fund in the bank.
Brad Smith, CEO of debt management company Rescue One Financial, in Irvine, Calif., works with more than 100,000 clients trying to avoid bankruptcy.
“Many of them could have avoided enrolling in a debt management plan had they had any type of emergency fund set up,” he says. “There are many people out there who are living so paycheck to paycheck that a blown transmission would send them into bankruptcy. An injured child or a natural disaster could easily be handled with additional funds.”
Start building your emergency fund with a specific goal in mind. While your savings goal will depend on your income and expenses, a general rule of thumb is to save enough to cover four to seven months’ worth of expenses.
“Everyone has wants, needs and desires when it comes to spending money,” says Pete D’Arruda, financial radio show host, author and president of Capital Financial Advisory Group in Cary, N.C. “Make sure you have seven months’ worth of emergency income available for the needs.”
Kevin Gallegos, vice president of Phoenix operations for Freedom Debt Relief, says to focus on having enough to cover expenses when setting your savings goal, not on replacing your entire income.
“Remember, in an emergency, we don’t fund vacations, fancy new clothes, dining out or other luxuries,” he says.
While you may aim higher eventually, Smith recommends making small goals at first, such as saving $1,000 and working your way up to a reserve to cover several months’ worth of expenses.
Your rainy day emergency fund should be easily accessible, but not so easily accessible that you’ll be tempted to make withdrawals for everyday spending.
Online banks also are good locations for your emergency savings account because you can’t just walk into the bank and withdraw your cash.
If you can’t stomach keeping a significant amount of money in a standard savings account with a low interest rate, consider a money market account that allows withdrawals only at certain minimum levels, or purchase short-term certificates of deposit with three- or six-month terms on a regular basis. You’ll earn some interest and be required to constantly reinvest.
Establish a monthly savings goal and make it part of your regular budget. Marquis recommends setting up an automatic monthly transfer, just as you would with the electric bill or fitness club membership, to ensure the money is saved each month.
Paying yourself first through a direct deposit from your paycheck into your emergency fund account will help you build your fund steadily. But make sure you’ve created a balanced budget so you know you have enough money to save, says financial coach Matt Wegner of Matt Wegner Coaching in Sheboygan, Wis.
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