How much money should I put away for emergencies?
March 29, 2012
Saving money for emergencies should always be a primary goal of any household money management plan. You never know what the future will bring, and by preparing yourself for misfortune you can ensure that you’re safeguarded as much as possible. Many people make the mistake of spending exactly as much as they earn, if not more. By living from paycheck to paycheck, these people set themselves up for disaster.
What if the main income-earner is involved in an accident and can no longer work, or what if he loses his job? What if the house requires substantial repairs after a disaster? What if someone in the family gets sick and must spend time in the hospital? Any one of these scenarios can easily ruin a person’s finances if he is not prepared.
By finding ways to set aside a little bit of money on a regular basis, anyone can improve his financial health. Even if the savings are small in the beginning, every penny saved has the potential to help out in an emergency situation. A person can further safeguard himself against emergencies by planning ahead and making smart decisions.
How much money do I set aside?
Ideally, you should set aside as much money as possible each time you get paid. The more money you can save, the better your chances of handling an emergency situation. Some experts suggest that you should save up between three and six months worth of living expenses.
Of course, each individual will have his or her own limits in regards to spending and saving, so a figure or percentage that may work for other people will not necessarily work for you. Instead of relying on another person’s figures, you should review your budget and figure out how much you might need and what you can afford to save.
For example, you will need to determine how much certain emergencies will cost. What is your insurance deductible for home, auto and medical insurance? How much might you need to repair your vehicle if certain common problems occur? If you lost your job, how long can you reasonably expect it to take to find a new job? How much do you spend every month, and how much of that money is essential to survival?
By answering these questions, you can arrive at a rough ballpark estimate of how much money you need to have available in your savings account. The more money in savings, the better, but don’t feel discouraged if you can’t put aside that much money right away. Some savings is better than no savings.
How can I calculate how much to save every month?
In order to determine how much to budget each month for savings, take a look at your expenses and see how much you have available to spend. Ideally, any money left over after your bills are paid should be available for investing in savings. If there is no money left after your expenses have been met, see if there is any way that you can cut a few expenses at least temporarily to allow you to set money aside.
You may need to do without certain luxuries for awhile until you’re able to fill your savings account. For example, you might cancel a gym
membership or magazine subscription, or you might eat more meals at home. After you’ve set aside enough money to pad your bank account, you can decide what’s worth spending money on again.
You should make sure to set your savings aside into an account that will earn interest so that you can make money on the investment. Unlike a retirement plan or college fund, however, this emergency fund should be immediately accessible. If something happens to your home or family, you need instant access to the money you’ve set aside. Because of this, a regular savings account with the bank is probably the best place to keep this money.
An individual can also save money on emergency expenses by making smart lifestyle choices. By spending money each month on insurance policies for home, health, auto and life insurance, he can relieve some of the burden from his emergency fund. The insurance policy will pay for related expenses instead. Additionally, he can reduce the chances of an emergency occurring by regularly maintaining his vehicle, living a healthy lifestyle and dealing with problems as they occur rather than putting them off until they become catastrophic. Avoiding an emergency is usually cheaper than dealing with it once it’s become urgent.
Pay Yourself First
After you’ve decided how much money you need to save and how much you’ll set aside each month, it’s important to stick to that plan. It might be tempting to skip a month of saving or dip into your savings to make a purchase, but you must control these impulses. Planning to save for the future will not help you; you must actually put that plan into action.
If you’ve budgeted correctly, you should know exactly how much money you can afford to save and how much you’ll need to cover your other expenses. Since you already know the figure, you can immediately transfer your savings payment into a separate savings account as soon as you’re paid. By keeping your money in another account, you don’t have immediate access to it; this will help you resist the urge to spend it on other purchases. The sooner you set it aside, the less likely you are to miss it and feel as though you’ve been deprived.
In many cases, it’s a good idea to pay off debts before setting aside money in savings. For emergency funds, it’s up to you to decide which is a more valuable payment. If you have the ability to pay off some of your debts entirely, you can do so and use the money you would usually spend on debt payments to pad your savings account. If you will not be able to pay off your debts quickly, you should still find a way to save at least a little bit of money for emergencies.
It’s also important to pay yourself back promptly any time you do spend money from your savings account. No matter what the emergency or the amount that you borrow, you need to refill the emergency account as soon as possible. By keeping your account topped up, you can protect yourself against future emergencies with a minimal financial impact to you and your family.
Written by Alan Dunn – one of our highly talented and underpaid writers. For more information on Alan follow him on Twitter or Google Plus
Category: Personal Finance