Understanding The Why’s And How’s Of Your Emergency Fund

emergency fund

Necessary Expenses To Cover In An Emergency Fund.

You probably already know that you need to have an emergency fund in place to use when times get tough. But do you know which expenses you need to account for? Here’s a fool-proof list to help you get started.

Emergency Fund

What expenses do you really need to cover in an emergency?

Let’s say the rug was pulled out from under you and you had to get by for a while without a regular paycheck.

What are the bills and other incidentals that you absolutely must pay every month to get by?

Here’s what should be on most people’s lists:

  • The roof over your head and utilities to keep your place habitable: Rent/mortgage and utilities (not counting premium cable, unless your heart would literally stop if you couldn’t access Game of Thrones) are must-pays.
  • Food: You’ve got to eat. But you don’t need to do it in restaurants all the time. So budget enough to cover a reasonable amount for groceries (and any meals/drinks/coffee out if that’s how networking in your industry is done).
  • Medications: Your health isn’t something to short-change during tough times, so don’t forget to include this in your tally of monthly expenses. Talk to your doctor about ways to cut costs without risking your health, perhaps by switching to the generic version of any drugs you take or buying online (and in 90-day supplies).
  • Transportation: Got a car payment? If you suddenly stop sending checks for your ride you’ll end up hurting your credit score and maybe even losing your car. Now, if you’re a two-car family in a town with good public transportation, selling the extra set of wheels may be a way to stretch your emergency savings further. But for the purposes of calculating how much you need for your emergency fund, use your current car situation.
  • Insurance: It’s tempting to stop paying for things like insurance (one of the few things we buy yet hope never have to actually use), but imagine how much worse your financial situation would become if you got into a fender-bender or if a storm blew the roof off of your house and you didn’t have insurance to help cover the losses.
  • Recurring bills: Don’t overlook any monthly bills (like your cell bill or home alarm system) or any expenses that you pay quarterly or annually. Here, again, calculate your expenses based on your current situation. Down the line you can revisit your actual needs and start cutting costs if you need to (e.g. downgrading your current mobile plan) when your contract ends, especially if changing plans would cost you money right now.

– via The Motley Fool

Deciding The Size Of Your Emergency Fund

Wondering how big your emergency fund needs to be? It can be a difficult thing to figure out, at times, especially when funds are tight. Here are a few helpful tips that will get you started saving up for when times are tough.

Start small

While you should eventually build an emergency fund that can handle more serious emergencies (economic downturn, loss of job, etc), you’re going to want to start by putting together a short-term emergency fund.

Your short-term fund is meant to take care of unexpected expenses that, while not severe, can still mean trouble if you aren’t prepared. Things like a car repair, replacing a broken window, or getting a parking ticket are all things that can be covered by your short-term fund. Ideally, you’d want this to range anywhere from $500 to $1,000.

Figure how much you’ll need in the long run

Chances are, if you find yourself out of work, the victim of a natural disaster or unable to work for any reason, $500 to $1,000 won’t be enough to keep your head above water.

So to make sure you can keep you (and your family) financially stable for an extended period of time, it’s best to save anywhere between three to six months’ worth of expenses.

That may sound like a lot of money (and in most cases it is) but believe me, having something to fall back on will make your recovery process all the more easier.

Building yourself a budget is a great way to figure out how much you should aim to save for a long-term emergency.

Figure out what expenses you’d really need to be covered (food, shelter, major utilities) and which you can do without for a short period of time (cable bill, online subscription services, etc).

Once you get that number, you can start working out a savings plan for yourself depending upon how much you’re able to sock away each paycheck. It might take a lot of time, but having a specific number in mind can really help to keep you motivated.

– via USA TODAY

Do you currently have an emergency fund? If so, how did you decide how much money you needed in it?

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