Any financial advisor worth their salt will emphasize the importance of having an emergency fund.
You should understand why an emergency fund is important and take steps to save accordingly.
Reasons that every family needs an emergency fund
Do you believe that emergency funds are unnecessary? The following points should change your mind.
Emergencies occur more often than you would like to think
Any number of emergencies could arise without warning. Your car could break down when you least expect it and require hefty repair costs. You could get unexpectedly laid off from your job. Your child could get an accident and you need to come up with a deductible for their medical costs. An emergency fund is necessary to help mitigate these risks.
You have better peace of mind
As the saying goes, you can’t put a price on peace of mind. The thought of all the things that could go wrong is often very stressful. You will feel a lot less stressed if you know that you have enough money to cover a few months’ worth of expenses if anything does go wrong.
You train yourself to make more prudent financial decisions
Most Americans are guilty of poor financial planning. It is important to change your state of mind, so you can get in the habit of preparing for eventualities that you are going to face.
You can develop a better perspective on personal finance by creating an emergency fund. You will find that the habits that you form will go a lot further than just creating this one fund. You will also learn how to save properly and continue saving for retirement and other life goals.
How can you build an emergency fund?
There are a number of ways that you can save for unplanned events. The following tips will help you build your emergency fund quickly.
Stop spending money on non-essential purchases
Many people blame their lack of savings on low wages. Even people that earn decent amounts of money think that they can’t possibly save and make ends meet.
Most people would realize that this isn’t true if they objectively reviewed their monthly expenses. One study by Ladder found that the average American adult spends $1,497 on non-essential purchases every single month. This means that the average American wastes $18,000 a year on things that they don’t need.
You should take a close look at your monthly expenditures. You will almost certainly find things that you can save money on. Even if you can reduce your expenditures by $500 a month, you can save an emergency fund in less than a year.
The benefits of cutting expenses is twofold. Of course, you will save money more quickly and build your emergency fund. However, you will also find that you don’t need to spend as much money every month as you thought. This means that you might not need as large of an emergency fund as you thought, which will help you reach your savings target more quickly.
Make savings automatic
You can set up your standard checking or savings account to make deposits into another account solely for your emergency fund. You will avoid the temptation of skipping the extra deposit each month. This forces you to save regularly.
Pay down debt at a reasonable pace
You should make it a priority to pay off debt. However, this priority should not replace your desire to build an emergency fund. It is important to do both at the same time. This means that you shouldn’t spend every cent of your discretionary budget on debt. Split your discretionary funds between contributions to your debt and deposits into your emergency fund. – Finance Twitter