NEW YORK (AP) — Maybe your car broke down, your computer was stolen, or you just had a surprise Urgent care visit. Emergencies are inevitable, but you can prepare to deal with them by creating an emergency fund.
“There are many things that happen in our lives that we do not expect, and most of them require financial means to overcome them,” said Miklos Ringbauer, a certified public accountant.
The industry standard is to save three to six months of expenses in an emergency fund. However, this may seem daunting if you are living paycheck to paycheck or if you have debt. But if you’re in any of these situations, it’s even more important Building a financial safety net That can help you in times of crisis.
“Emergency funds allow you to prevent further debt,” said Jaime Eccles, certified financial planner and head of wealth management at financial advisory firm Plante Moran.
Let’s say you pay multiple credit cards and other loans. In this case, Rachel Lawrence, head of consulting and planning at Monarch Money, a financial planning and budgeting app, recommends making minimum payments as you build your emergency fund. Once you reach an amount that fits your lifestyle, you can go back and continue tackling your debt more aggressively.
Whether you want to build an emergency fund or create better habits while saving, here are some expert recommendations:
Start with small milestones
The thought of saving for three to six months can be daunting, so it’s best to start smaller. Lawrence recommends starting with a goal of saving $1,000, then working your way up to saving one, three, and six months of expenses.
The way is yours Getting closer to this goal It can vary depending on your income and budget. But starting with small, achievable goals can help you build an emergency fund without feeling financial stress.
“Starting small is good. Even if it’s $20 right out of your paycheck, those little things can add up,” Eckles said.
She recommends setting up your emergency fund in an account separate from your regular savings account, ideally a high-yield savings account, which offers a higher interest rate than a traditional savings account.
Decide what amount is right for your life
Knowing how much to save for your emergency fund depends on your life situation. Lawrence suggests that you measure your financial responsibilities to estimate the ideal amount for your emergency fund.
For solo professionals who don’t have major financial responsibilities, such as a mortgage or car, the amount may range from $2,000 to $3,000. Meanwhile, people with children and several pets may aim to save for six months’ expenses.
“There’s no one-size-fits-all solution. Everyone is different, especially if you have expenses that change on a monthly basis,” Ringbauer said.
Lawrence recommends that freelancers keep two emergency funds: one to protect low-income months and one for true emergencies. To build your temporary account, Lawrence recommends setting aside some money during… Months with high income.
“You have to put that amount aside in your reserve account until you have the amount you want for two or three months,” she said. “Because this way, whichever month you have less money, you can withdraw from the reserve, and it’s not a big deal.”
Automate your savings
Eckels recommends setting up automatic savings as a low-effort way to build your emergency fund.
Scheduling your savings to be withdrawn from your bank account as soon as your paycheck arrives is an effective way to Build a saving habit Without having to transfer funds manually.
“I always tell people that if you never had it in your bank account, you never had it, right?” Eccles added.
She also recommends that her clients open a separate account, one that is not at the same bank as their checking account, so that they are not tempted to transfer money during non-emergency situations.
Make it visible
As you make progress toward your emergency fund goal, making it visible can help you stay motivated, according to Lawrence.
She recommends getting creative with how you track your progress, ideally using a method that brings you joy.
“You want your brain to be rewarded whenever possible when you see a bunch of progress,” she said.
Some options for making your progress visible include drawing a thermometer-like tracker and keeping it updated as you progress toward your goal, documenting your progress on a habit-building tracker on your phone, or using a budgeting app with a tracker.
Save windfalls
If your budget is very tight and you don’t have a lot of wiggle room to set aside money for an emergency fund, Lawrence recommends saving for windfalls.
“Unexpected amounts of money that you may not have expected, e.g Tax refund “Or getting a third paycheck when you normally get paid twice a month, or getting a bonus, those are the best ways to make progress when you’re tight otherwise,” Lawrence said.
In general, Lawrence recommends that people keep 10% of their windfall for themselves and the rest for their emergency fund. With this division, you can save and feel rewarded by unexpected income.
If you use it, don’t feel guilty
Chances are an emergency will happen, and when it does, there’s no need to feel guilty about using your emergency fund, Lawrence said. Instead, it’s better to think about how you can achieve your goal of building a financial safety net for yourself.
“You won’t feel bad about using a down payment on a house, and you won’t feel bad about saving for retirement, or actually retiring,” Lawrence said.
——
The Associated Press receives support from the Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent organization is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.
The post Building an emergency fund can feel daunting, but these tips can help first appeared on Investorempires.com.
