Money Smarts Blog
Don’t Get Stuck in the Cold, Be Prepared for Financial Emergencies
Jan 7, 2020 | Kelly Hendershot
As the seasons change, are you prepared if your furnace or air conditioner breaks? Or if a flat tire leaves you stranded on the side of the road? What about an unexpected trip to the Animal Emergency Center when your dog has gotten into chocolate? Or was that one just me?
You get the point. Life happens. Here are some tips to be prepared for financial emergencies any time of year.
How much to save
Start manageable. Set aside $1,000 as quickly as you can. Think of this as your starter fund. It’s an amount that can cover most minor emergencies (flat tire, hot water heater, insurance deductibles for urgent or emergency care, etc.) and can be saved in 90 days to a year. Do a quick search for “$1,000 emergency fund challenge” and you’ll find several free downloadable trackers.
Once you hit $1,000 go ahead and congratulate yourself… but don’t stop there. Most financial experts suggest that your full emergency fund should equal three to six months of your expenses. Get out the calculator and figure out your monthly expenses. Multiple that by three and make that your next goal. Once you’ve reached that – double it. You’ve got this!
Where to save
An emergency fund will keep you from tacking on interest-based credit card debt or tapping into your retirement account. Your emergency fund needs to be accessible. It can be tempting to put this fund into a CD to earn more interest, but then you’ll be faced with an early-withdrawal penalty fee if there’s an emergency and you need to use it.
Ideally, you want to build your emergency fund in an interest-bearing Money Market or Savings account. This should be separate from your general savings account. Consider one an opportunity account and the second your emergency account.
Use your opportunity account to save for:
- A new car
- A much-needed vacation
- Down payment on your dream home
- College (for you or your kids)
Use the emergency account to be prepared for:
- Auto repairs
- Replacing a stolen passport
- Radon mitigation
- Losing your work-study job
When to use emergency funds
Your emergency fund should ONLY be used for unexpected emergencies.
If that’s too vague, only dip into your emergency fund if you can answer “yes” to these three questions:
- Is it unexpected?
- Is it necessary?
- Is it urgent?
As life happens and you deplete these funds, be sure you’re building the account back up as soon as you’re able.
How to build your emergency fund
- Make a budget and stick to it. Review and update your budget often.
- Evaluate recurring payments. Entertainment streaming can be a less expensive option than cable, but not if you subscribe to every streaming option available.
- Turn off auto-reload option. While it may be convenient that Starbucks will charge your credit card and auto-reload your gift cards, they’re helping you spend rather than save.
- Cook at home rather than eat out.
- Sell something. Look around your home; there’s bound to be something collecting dust that can be quickly converted to cash. Apps, such as OfferUp and Let Go, and Facebook swap groups may be more conducive to quick savings rather than stock piling items to wait for a garage sale.
- Get a second job. It may not be appealing to add hours to your work week, but a second job doesn’t have to be permanent. Once you’ve reached your emergency fund goal, reassess your financial situation and decide if it’s time to quit.
- Consider a side hustle that doesn’t have the same pressure of set hours that a second job can have. Babysit, house sit, care for pets. Answer online surveys or participate in focus groups. Take up blogging.