In the event of the unexpected— your car needs repairs or unforeseen medical expenses— you have an emergency fund ready and waiting, don’t you?
I’ll assume, from those crickets I heard just now, that you don’t. Everyone needs savings in the event that an emergency crops up especially when you’re barely scraping by. When you have little to no savings, anything unexpected can send you further into debt because you will either use your credit card or get a loan. Building an emergency fund is essential to avoid increased financial burden.
Emergency Fund: Why, What, How, Where?
Why Do I Need An Emergency Fund?
An emergency fund is a sum of money that you set aside in case unexpected costs arise and it’s important because:
- It prevents you from digging yourself deeper into debt
- You can address a crisis quickly
- You won’t have to assume a fetal position and sob into your pillow since you’re prepared!
What Does The Emergency Fund Cover?
An emergency is an unforeseen event that will impact your well-being or an important asset such as your home or car, if immediate action is not taken.
It can include but is not limited to:
- job loss
- an essential appliance or fixture that stops working e.g. refrigerator or furnace
- medical bills due to sudden illness or accident
- major unexpected home repairs e.g. flood
Bills, payments that you forgot to plan for, such as insurance, or wanting a bigger TV do NOT qualify as emergencies.
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How Much Money Do I Need?
Ideally, you should save enough money to cover four to seven months of expenses. This may seem daunting, so start small. Dave Ramsey, a trusted financial expert, recommends saving $1000 for your emergency fund. You can always build from there but a small amount in savings is better than nothing at all.
Where To Keep The Fund?
Unexpected events can occur at any time so having quick access to cash is crucial. Place your money in a savings account at the bank or credit union that is separate to your usual account(s). A debit card or cheque book attached to the savings account would be great for accessing the money when it is needed. If the emergency occurs outside of regular banking hours, you don’t want to be stranded without access to your money. If you are worried about spending the money on everyday purchases, store the debit card or cheque book in a safe place at home to avoid temptation.
5 Ways To Build Your Emergency Fund
Get extra income
If you are struggling to get by on your income, finding money for an emergency fund will seem unimaginable. Get a second job or work from home to generate some additional money each month. You can search for part-time jobs in your local newspaper or online. Avoid being picky. It may not be your ideal job but it will bring in money as long as you are willing to put in the work.
If you would rather work from home, try one of the following options:
- Babysitting for family and friends
- Start an online business e.g. Etsy
- Teach classes e.g. music, craft
- Tutor students or adults if there’s a subject you are good at
- Become a virtual assistant
Have a Garage Sale
Go through every room in your home and find items that you no longer use or need that are in good condition or can easily be repaired. Don’t hold on to items just because you feel guilty getting rid of them. Place an ad on social media or on Craigslist and have a garage sale. Not only will you clear your house of clutter, you will make some much-needed cash!
Keep The Change
When you or anyone in your family receives $1 or $5 bills, place them in a change jar. Store the jar in a visible place and when it’s full, take it to the bank. This can be a fun way to teach your kids to save as well. Make it a challenge to guess when it will fill up by and the winner can receive a small prize like picking the next family night movie.
Cut Back On Bills
Groceries and your utility bills can really put a dent in your purse. Meal planning, eating less meat and buying food in bulk are great ways to slash grocery costs.
It’s easy to spend a ton of money on electricity, water, gas, phone and cable if you don’t pay close attention to your usage and packages. Bundle services where you can or get rid of them all together. For twelve ways to save on utilities, see this post.
Stop Eating Out
I will admit that buying food used to be my Achilles heel. I am not the biggest fan of cooking but meal planning and prepping has save me a lot of money. Eating out is expensive and fast food, while cheaper, still adds up. Make your own delicious home-cooked meals and save your waistline and your bank account from further damage. The money that you save can contribute to your emergency fund.
Unforeseen events will occur whether we like it or not but they do not have to lead to panic or more debt. It is better to be prepared and have a cushion. By using these tips to build your emergency fund, you will be ready whenever disaster strikes.