When should you start saving money in an emergency fund?
“Mama always said, life is like a box of chocolates. You never know what you’re gonna get.”
Who thought Forrest Gump’s enduring quote would ring true for so many circumstances in life? You know how randomly things can happen, so you’ve considered his outlook as it relates to your finances. You’ve estimated all your expenses. You pay your bills on time. You have every expense listed in your budget: rent, utilities, car payments, maintenance, food, entertainment, and so on. You’re in control.
At least, you think you’re in control.
Does your budget include saving for an emergency fund? Unforeseen circumstances can befall even the most diligent budgeter. A raccoon digs a hole through your roof. An illness or accident keeps you off work. If you’re laid off, you can throw your budget out the window.
Like a box of chocolates, you never know what you’re going to get. So the time to start budgeting for emergencies is right now. Take these 3 steps today and start saving money into an emergency fund to build your future security and peace of mind.
1. Save money to your emergency fund in a separate account
Open a new bank account and get online access. Have some fun by naming it something crazy, like “Rainy Day” or “Dodged the Bullet” – it’ll seem less like a chore to save!
Calculate how much you need in your emergency fund. Most financial advisors recommend saving money for about 4 to 6 months worth of expenses. That’s the average time you’d need to get back on your feet if an unfortunate incident happened. If the amount seems discouraging, shoot for 2 months to start. The most important step is to start with a goal.
Decide how much you can reasonably put into this account every pay cheque. Even $10 is a start, but try to push yourself a bit. If you can you manage $50 per pay cheque, you’ll be done saving money a lot sooner. Now enter this new expense on your existing budget, maybe finding ways to reduce other expenses to make up the difference.
Calculate how long it will take to save this amount. If your goal for saving money in your emergency fund is $5,000 and you save $100 per month, it’ll take several years. That’s ok, because you’ve made a start.
2. Choose automatic payments to save money
Make it painless and easy to save money. Set up an automated recurring transfer or ask your bank to divert funds into your emergency savings every month. It might hurt a bit at first, but after a while you won’t notice the difference. And, if it’s deducted automatically, you won’t have it in your account to spend, eliminating temptation!
3. Make sure your emergency fund is easy to access
Sometimes people think they should make their emergency fund inaccessible to prevent the temptation of using it for non-emergencies. Don’t make this mistake! There’s no point in having an emergency fund you can’t access.
If you ever need cash in a real emergency, you can’t deal with delays caused by funds that are tied up. If you have to go to the bank in person or liquidate investment funds, you might not be able to access your cash when the chips are down.
Simply resolve to leave your fund intact for real emergencies by budgeting the money as an expense and pretending you don’t have it anymore.
Congratulations! If you’re budgeting for emergencies, it probably means you’re well on your way to peace of mind. If bad luck hits before you can save up your target amount, don’t despair. Help is available to get you through a rough patch. Consider a loan from Magical Credit. For more information, call Magical Credit or fill out our online application today.