If you feel uneasy about your finances, it might be because you don’t have enough emergency savings. A sudden bout of unemployment or an unexpected major expense could turn anyone’s financial stability into a horrifying nightmare. The good news is you can remedy that problem faster than you think.
1. How Much
There are dozens of ways to calculate how much you should set aside for emergencies. You can (and should) consider how liquid your other investments are, how much insurance you have and how stable your income is to make an accurate calculation. But if you don’t want to do that kind of research there is a simpler method. Think back over the last 3 years and ask yourself what was the largest amount of money you needed to get your hands on fast. That’s probably the same amount you need to keep available for tight spots going forward.
There is no way to know for sure how much you’ll need for an emergency that has yet to occur. But regardless of how you run the numbers, make an educated guess and pick your target.
If you don’t have an emergency fund now despite all your best efforts that just means you’re going to have to change some of your financial behaviors. So if creating an emergency fund is a priority you’re going to have to “bring it”.
Let’s say you decide you need $7500 as an emergency fund and you want to accumulate that money in 10 months. You need to cut spending by $750 a month in order to achieve your goal. No magic here. But lots of hard work.
Go through your past spending records and identify where that savings is going to come from.
Neal’s Notes: Believe it or not, how much you set aside for your emergency fund can tell you a great deal about your financial behavior – and what needs to change. Don’t overlook this because it can provide invaluable insights.
3. Automate It
Contact your bank and open a new savings account. Set up an automatic monthly deposit of $750 funded from your checking account. This puts your savings on auto pilot and makes it very easy to accomplish your goal. You simply must succeed this way.
4. Emergency Back Up
Let’s say you have identified how much money you need to save for emergencies and you have no problem hitting your monthly goals. But what happens if an emergency besets you before you are able to reach your goal?
That’s where your emergency – emergency fund comes in. Consider setting up a home equity line of credit if you have equity in your home. This will give you instant access to cash when you need it. If a HELOC is not available, think about your other liquid assets as a resource. If all else fails, contact your friends and family and ask them to provide an emergency backdrop just in case.
You don’t want to find yourself in very deep water without a life preserver. Don’t wait to take care of this potential calamity until the sharks start circling. At the same time, make sure you don’t have too much liquid. Believe it or not, this can actually pose a real danger to your retirement.
How did you create your emergency savings fund? How long did it take? What would you do differently?
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