What if you suddenly had to spend $500 to repair your car’s alternator? What if your furnace conked out and you needed to spend that same $500 to get the heat flowing through your home again?
Could you pay for these emergencies without resorting to your credit card?
If you couldn’t, know that you are far from alone. According to a report released by financial website Bankrate earlier this year, the majority of U.S. adults – almost six out of every 10 – don’t have enough money in their savings accounts to cover an unexpected $500 emergency expense.
Bankrate reported that only 57% of Americans have enough money saved to cover an unexpected expense of $500 without resorting to their credit cards or borrowing money from another source. That number is too high, but it’s down just a bit from the results Bankrate reported in early 2016.
The problem that those who can’t handle a sudden $500 expense have? They haven’t built an emergency fund .
An emergency fund is exactly what it sounds like: a pool of money that you set aside in a savings account or other no-risk savings vehicle with the sole goal of using it to pay for unexpected expenses. An emergency fund can also help cover bills if you should lose your job or if your monthly income suddenly drops.
Financial experts recommend that you have at least three to six months of daily living expenses saved in your emergency fund. Ideally, you should have even more, up to 12 months.
That might seem overwhelming. If you determine that you need $3,000 a month to live on, you’d have to save $18,000 just to have that six-month cushion and an even more intimidating $36,000 for an emergency fund that could last you a year.
Fortunately, it’s easy to start an emergency fund. Even setting aside a small amount every month can get you started.
Here are some tips from financial experts on how to steadily build this important stash of emergency dollars.
Automate Your Savings
Maggie Germano, a certified financial education instructor and owner of Maggie Germano Financial Coaching, said that the best way to start filling in that emergency fund is to set up automated payments to the highest-yield savings account you can find.
If your regular emergency-fund payments are automated, you’ll be more likely to make them each month, Germano said.
“Set up direct deposit from your paycheck or have your bank make scheduled transfers,” Germano said. “This way, you don’t have to think about it and you won’t miss the money. You’re way more likely to save when you do this.”
Make (Quite Small) Sacrifices
Personal finance author Danny Kofke, writer of “A Bright Financial Future: Teaching Kids About Money Pre-K Through College for Life-Long Success,” says that it usually requires just the smallest of sacrifices to generate the money you’ll need to start building an emergency fund.
Consider if you spend $100 less than you earn each month for 10 years. You’ll have saved $12,000 during this decade even if you never invest those savings in an interest-generating account, Kofke said.
Applying this logic to an emergency fund means that even small sacrifices – such as skipping your morning coffee run or brown-bagging your workday lunches – can add up to extra money that you can deposit in an emergency fund.
Don’t be discouraged if your deposits start out small. Even small deposits can add up over time. So instead of spending money on eating out, cook at home more often and deposit the savings into an emergency fund. By taking such small steps every month, you’ll slowly but steadily build that fund.
“The difference between sinking in debt and walking on the firm ground of savings is a matter of a few dollars a day,” Kofke said.
John Reinmuth, manager of Wellspring Financial Planners in Gig Harbor, Wash., said that it’s important for people to set realistic goals when building their emergency funds. If you try to save more than you can reasonably handle, the odds are high that you’ll quickly fall short. And when you do, you’ll be more likely to give up on stowing any money in your emergency fund.
Someone with a yearly income of $30,000 or less, for instance, might be able to contribute $25 a pay period to an emergency fund, Reinmuth said. That shouldn’t be considered a failure. As Reinmuth says, if such individuals are paid once every two weeks, that $25 investment a pay period would grow to $650 in one year and $1,300 in emergency savings in two.
Those families earning from $75,000 to $100,000 a year should be able to transfer at least $100 a month into an emergency fund, Reinmuth said. That comes out to $1,200 in just one year.
“Families must make a clear decision to start an emergency fund, establish a specific plan and then implement that plan,” Reinmuth said.
Make a Plan
Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network, said that it’s important to plan for how you’re going to build your emergency fund. He says that you should make contributions to fund part of your regular household budget. This makes it less likely that you’ll skip making contributions to it.
Gallegos said, too, that you should contribute to your emergency fund on a regular, scheduled basis. He recommends that consumers deposit money in their emergency fund on a weekly basis. Even if you deposit just $10 a week this way, you’ll have more than $500 saved during a year, Gallegos said.
“Many experts recommend saving 10% of all income received,” Gallegos said. “More is better. But whatever the percent is, pick what you can do consistently and stick with it.”
Do you or your family have an emergency fund established? What tips do you have for fellow Zing readers to save for the unexpected? Let us know in the comments below!
The post Can You Afford an Unexpected $500 Emergency? If Not, You Need an Emergency Fund appeared first on ZING Blog by Quicken Loans .