Most of us are familiar with that age old theory of “saving for a rainy day”. In today’s economy, however, developing and maintaining an emergency fund is more critical than ever. Now, not only do we need to be prepared for unexpected expenses like malfunctioning major appliances, automobile repairs and hospital bills, but many people need to be concerned about job stability as well. Even individuals who are self-employed need to prepare themselves for falling market conditions and disasters that might affect their business.
While many people rely on credit in the case of an emergency, it is important to remember that doing so can be detrimental to your financial future, and having an emergency fund is a much better choice. Using credit to bail yourself out of emergencies will simply leave you swimming in debt, swamped with bills, and struggling even harder to recover.
No matter how much money you make, or how well things are going at the moment, you never know when an emergency might arise that could leave you and your family struggling to pay bills, purchase needed items or even survive. Maintaining an emergency fund reduces the chances that you will have financial difficulty if such a disaster should happen.
How Much Money Should I Save?
Now that it has been established that an emergency fund is necessary, you are probably asking yourself “how much money should I save?” While experts used to say that a savings of at least six to nine months’ pay was safe, these days many experts are opting for an even larger fund. Many experts now recommend a savings of nine months to one year of income. If you have more than one substantial income in your household and feel confident that you would be able to cut back on expenses in case of an emergency, then less savings may be acceptable, but in most cases, it’s better to be safe than sorry.
Preparing for a Rainy Day
If you are new to the whole emergency fund concept, or have tried to put emergency funds away in the past without success, there are a few tips that will help you develop and maintain a savings account for emergencies.
- Set up an entirely separate account that is to be used only for emergencies. Your account should be easily accessible, as well. Money that is tied up in retirement funds or stocks can be difficult to access in the event of an emergency.
- Don’t underestimate your expenses when asking yourself “how much money should I save?” While it’s true that anything is better than nothing, it’s also true that the more prepared you are the better.
- Contribute a set amount each time you get paid. Most employers offer direct deposits that can be separated into more than one account. This option seems to be the most successful in helping people save, since the money is placed into your savings automatically.
- Put any tax returns or bonuses from your employer directly into your savings account. Chances are, if you have been getting along just fine without the additional funds, you don’t need them now.
- If you are having difficulty justifying the funding of your emergency account, cut back on other unnecessary expenses in order to acquire the extra cash needed.
If you are interested in finding out more about developing or maintaining an emergency fund contact a credit counsellor today at www.solveyourdebts.com.