Wednesday, 5 July 2017

Take a minute and think about the last time you were in a financial bind—a real emergency.

Maybe you came home to a medical bill you weren't expecting, or you needed to hop on a flight on short notice to be with an ailing family member, your car's transmission died, or you lost your job and needed to pay rent.

 We've all experienced varying degrees of these types of emergencies. They can be terrifying on an emotional level, but that terror is further compounded if you don't have the funds to tap during a difficult time. That is where an emergency fund comes in handy.

But for many, emergency funds seem out of reach. According to some statistics, the majority of Americans live paycheck to paycheck and don't have the funds to take them through an emergency without serious financial damage by way of credit card debt or worse.

Here, we answer three of the biggest questions around emergency funds to help you get started on a positive financial future. 

Why do I need an emergency fund?

You are healthy. Your family is healthy. You own your home and your job is secure. So why do you need an emergency fund?

“You need one to handle the unexpected," says Kevin Gallegos, vice president of Freedom Financial Network in Phoenix. “Unexpected expenses come up for everyone— maybe it is a car repair bill or a medical expense. The purpose of an emergency fund is to cover the unexpected." 

Ilene Davis, a licensed financial consultant based in Cocoa, Fla., was faced with a potential disaster a few months ago when Hurricane Matthew threatened to destroy her home. “We were right in the path, but it never got to us," she says. “And while our insurance may have covered some of it, we have a $25,000 deductible on things like that. Without an emergency fund, it could have really hurt us."

How much do I need? 

The exact amount a person, couple, or family needs in their emergency fund is up for debate, but most financial professionals recommend opening a savings account and saving enough to cover three to six months of expenses.  Others say six to nine months. It's important to remember that these are essential expenses only (food, rent/mortgage, utilities, healthcare and medicine, credit card payments, transportation and auto loan payments), not discretionary expenses (meals out, travel, entertainment). 

“Start by measuring how much is 'enough'—that amount can be different for everyone," says Gallegos. “Think about the level of expense that causes you to rush to use a credit card. Is it a $250 car repair bill or a $500 medical bill? That is the amount to start with. Have at least that available and keep building." 

How can I start saving?

It can be daunting to calculate your three, six or even nine-month living expenses and create a plan to save that much, especially if you're already strapped for cash. But saving is possible for everyone. Before you start, make sure you can pay your monthly mortgage/rent, recommends Gallegos. Then, pay off any credit card debt.

From there, it's all about keeping track of your spending and getting frugal. “I have a client who was complaining that she didn't have time to make dinner every night, so she and her husband went out at least two days a week," says Davis. “That can really add up, so I told her to start using simple recipes with things you probably already have in your pantry, preparing food in advance, and making crockpot dinners so she could do other things while the food is cooking."

Davis recommends bringing your lunch instead of going out, finding roommates to share the cost of your home or apartment, and then rewarding yourself for saving. 

“Every time you save $1,000, give yourself $100 to spend on whatever you want," she suggests. “It will help you stay motivated." 

Gallegos recommends making your emergency fund part of your budget and setting up an automatic deduction. You could start with $10 per week and increase every time you get a raise. He also advises clients to generate extra income by selling things on Craigslist, eBay, or even a garage sale. “If you have a one-time financial gain like a tax refund or commission check, put it toward your emergency fund," he says. 

Davis advises people to think small. “Can you save $7 per day? If so, you will be saving $49 per week," she says. “Do that all year and you will have a whopping $2,548 in your emergency fund by the end of the year. It adds up quickly." 

Bonus: Is there an app for this? 

Yes. There are several apps that can help you save for an emergency fund. A few popular ones include Mint, LearnVest, BudgetSimple and Goodbudget.

Happy saving!

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