Sometimes, when life gives you financial lemons, you can no longer afford the things you need to make the lemonade.
In other words, your normal living expenses don’t become optional just because of an unexpected financial obligation. These events can leave you clamoring to make ends meet, but with a few tips and some smart financial planning, you can be ready when you’re hit by an unplanned expense.
We’ve all been in that stressful position where we are faced with an unanticipated expense that needs to be paid immediately. Your anxiety levels increase as you wonder how you’re going to meet this sudden financial obligation while continuing to pay for necessities like food, gas, housing, and utilities.
Maybe your car or truck needs a new transmission, and that can cost anywhere from $3,000 to $7,000. You can’t go without a car, so you frantically try to find the funds to cover the repair cost.
What about emergency medical procedures? Need a root canal? That can cost $1,000 per tooth. You can’t sit around in pain, so you need to find a way to pay for it now.
If you don’t have the cash-on-hand to pay these bills, you might consider paying with a credit card. However, this option can cost you a lot more money in the long run because of the interest you’ll have to pay overtime.
This is where an emergency fund can be a significant help.
An emergency fund is a bank account where you save money for the sole purpose of covering large, unexpected expenses. It serves as a safety net, so you don’t have to sacrifice your normal expenses and obligations to pay for the surprise bill.
Some financial experts recommend saving enough money to cover 3-6 month’s salary in the event that you lose your job or get injured and can’t work. However, any amount that you’re able to save can help ease the sting of having to pay the unexpected bills.
The one thing that isn’t debated, however, is whether or not an emergency fund is a good idea. Since it can take a while to save enough for an emergency fund, it’s a good idea to start now.
Here are some tips to get you started:
1. Open a savings or checking account separate from the ones you normally use.
This keeps your emergency fund dollars separate from the money you spend day-to-day.
2. Set up automatic deductions from your paycheck.
You can set up paycheck deductions that are automatically deposited into your emergency fund account. Even if you only deduct $10 per weekly check, you’ll have saved $520 in a year. If you don’t have the choice of automatic deductions, take $10 out of your paycheck and immediately deposit it into your emergency fund.
3. Put your tax refund or bonus to work.
If you get a tax refund or bonus, then put at least half of the money into your emergency savings. According to the IRS, in 2015, the average refund was $3,200. Adding $1,600 to your emergency savings is a quick way to build your financial cushion.
4. Cut your expenses and put the money you save into your emergency fund.
Find a lower cost cell phone or internet plan and bank the difference. Take the money you spend every week on take-out and put it into your savings account. Raise the deductible on your car insurance and put away the money you save.
5. Keep the change.
All the quarters and nickels weighing down your pocket can add up to hundreds of dollars over the year. Collect them and put them into your savings. Another idea is to round up the cost of every purchase you make and put the difference into your savings. For example, if you spend $47.35, put $2.65 into savings. Some banks offer programs that do this automatically when you use your debit card.
6. Pay yourself.
When you pay off a debt like a loan or credit card bill, take the amount you were paying each month and deposit it into your savings.
Building an emergency fund takes commitment and effort. At times, you may be tempted to spend this money on non-emergency items, but just remember: the temptation is not worth the financial strain that comes from not having the money to cover unexpected events.
The best approach is to save the money now, and then put it out of your mind until you need it. Then rest easy, knowing that when that next unexpected bill comes, you won’t have to sweat it.
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