Why Is It So Important To Have An Emergency Fund?
Oct 01, 2017
In the midst of Hurricane Season and Fire Season and even Earthquake Season, it is important to ask ourselves these questions. The word EMERGENCY broke it down pretty well. We need to have funds for any unexpected events. This should be liquid assets that are readily available.
Here are the major unexpected events that we can run into:
1. Job Loss
2. Medical Emergency
3. Car Repairs
4. House Repairs
5. Weather Conditions
When a hurricane is approaching an area, most individuals are subject to hours of preparation, which means an increment of expenses, by having to buy extra nonperishable food, supplies like flashlights, candles, plywood, and of course water. This also means hours of loss of work time. If you do not evacuate the area, you can lose your car, your home will also incur in damages and that is without counting personal items that could be lost due to wind or water damage.
Fire is something very unexpected as well. How about insurance protection for flooding, wind, fire or earthquakes? This is a must if you own a home. Also, are you prepared to get your most valuable items in case you have to suddenly leave?
Now, a recent study made by FINRA reveals that at least 26% of the population in the US has unpaid medical bills, 22% have overdrawn their checking account, about 14% has taken loans from their 401K and 10% has withdrawn completely their retirement account due to emergencies.
So how can we create an emergency fund? You probably might say, "I have to pay off my debt first".
Well, I know that there are experts that recommend you pay off your debt first, but I think you should do both. Actually, I think you should pay yourself first and then you pay your debt. I know that by nature we want to pay our debt first, but if you pay yourself first, then pay your debt, you will see that little by little you will be able to accumulate money for those rainy days and you will experience peace of mind.
How much should you have in an emergency fund? It is a rule of thumb to have at least 6 months to cover your expenses. I am not talking about vacations, travel, that concert, guitar or piece of clothing that you really want, but your monthly expenses.
So here are the steps to create an emergency fund:
1. Calculate how much you will need (6 months of expenses)
2. Keep your funds accessible, but not too accessible. I learned that having a savings account connected to my checking doesn't work. So I have another bank account that it is accessible, but with another bank institution that is not connected with any checking account, but at the same time, I have a card, that can give me access in case of emergency. However, I don't carry that card in my purse either.
3. Pay yourself first. You can do this two ways, by taking part of your paycheck and deposit it there or have your employer direct deposit a specific percentage or amount to that account. If you are an entrepreneur, set an automatic monthly transfer to that account with your bank. But make sure that you won't have easy access to the account at all times.
4. Before you take money out, you have to answer the following questions. "Is this really an emergency?" "If I don't withdraw this money, is it going to end in an adverse action and there is no other way to get the money?" "Did something unexpected and urgent happened?" If your answer is YES to all of the questions, then this could potentially be an emergency.
Here are the positive on having an emergency fund:
1. It will give you peace of mind
2. It will control the way you spend your money
3. It will avoid for you to making bad financial decisions
4. It could save your life
5. It will prepare you for a rainy day
6. It will give you FREEDOM
Start small if you have to, but START.
Stay connected with news and updates!
Join our mailing list to receive the latest news and updates from our team.
Don't worry, your information will not be shared.
We hate SPAM. We will never sell your information, for any reason.
