Do you have enough saved to cover a major car or home repair or unexpected hospital bill? If not, having money set aside for emergencies is extremely important.
In this Money Management Tips
post we’ll explore some ways to help ensure you’ll be able to afford any large unexpected bills.
What is a rainy day / emergency fund?
For the sake of simplicity we’ll be referring to this money as an emergency fund through the rest of this article. An emergency fund is money you’ve set aside for any unexpected bills, job loss, illness or decrease in salary. It’s a way to make sure you’ve got some excess cash available in case of an emergency so you don’t have to rely on credit cards which can potentially lead to large amounts of credit card debt.
If the transmission dies on your car do you have the means to pay the $2,000-$3,000 to get it fixed? If the furnace in your house dies in the middle of the winter do you have a few thousand dollars to buy a new one? If you were seriously injured in an accident and need to cover a several thousand dollar insurance deductible, can you do that? Will you be able to cover a four to seven months of rent / mortgage and expenses if you suddenly lose your job?
These are all cases where having money set aside in an emergency fund will make an extremely difficult time a lot easier to manage.
How should I manage my emergency fund?
This really comes down to how you manage your own finances. If you have the discipline to keep everything in one account then all you need to do is make sure you have extra cash available in your checking or savings account (How much? We’ll cover that later).
Another option is to have separate accounts for your various emergency funds. Keeping this money in a high yield savings account is a great way to earn a little extra money as well. Using this method, you’d have one combined or separate accounts for what you’d like to cover with your emergency funds. For example, if you have a car and own your home then it might be good to have an account for each. Then, each month you’d transfer some amount of money to each of those accounts where the money stays hidden away until an emergency occurs.
If you decide to open an account for each type of emergency it’s important to make sure the account has enough money to cover your needs if an emergency occurs. Usually a few thousand dollars will cover an emergency or unexpected bill.
How much money should I have in my emergency fund?
This really depends on your financial situation and what kind of emergencies you might encounter. Someone living in a rented apartment with no car will need far less of an emergency fund than someone who owns a home and has multiple vehicles.
At the minimum we’d suggest having at least $1,000 set aside for each vehicle you own. Take a look at your health insurance information and find out what your deductible is and keep that amount. This could be anywhere between $500-$3,000 depending on your insurance plan. If you have a spouse and children, keeping the deductible amounts for them is also advisable. Owning a home comes with a lot of unexpected expenses as well. Having at least $2,000 put away for any emergency replacements would be a good start. This would let you quickly buy a new oven, a/c unit, refrigerator, etc without having to worry about the money. Having an account to cover personal expenses for a few months would also be great in the case of job loss. Simply add up all your expenses (mortgage/rent, car loan, groceries, gas, etc) for 3-4 months and keep that amount tucked away.
If you don’t have the money available to immediately transfer to your various emergency funds then you can always transfer $25-$50 per month into your accounts until you’ve reached your necessary amounts.
This is part of our weekly Money Management Tips
series that aims to help you take more control of your finances. This series gives tips on everything from tracking your spending to improving your credit score.