If the pandemic has taught you anything, life — and your finances — are unpredictable.
Unexpected financial challenges can crash land in your life without any warning, from unprecedented lockdowns and labor shortages to comparatively mundane doctor’s visits, car repairs, and household maintenance.
While you may not be able to guess exactly what’s in store for 2024, you can be better prepared for the unexpected with an emergency fund. This special savings account is there to help you cover expenses and financial hardships you didn’t think to include in your monthly budget.
What is an Emergency Fund?
An emergency fund is a specialized savings account that you assign to the unexpected. You can tap into this fund if you lose your job, or you can rely on it when you need to take your car into the shop ahead of schedule.
Unlike other savings accounts, you should only dip into this cash for unplanned, unavoidable, and urgent circumstances.
Most financial advisors recommend you choose one of three targets for your savings goal: three months, six months, or 12 months of living expenses.
Your choice will depend on your risk tolerance and your industry. People working in vulnerable sectors like transportation and construction face the biggest chance of layoffs, unlike the healthcare and cybersecurity industry sectors.
Why Calculate Living Expenses?
The rule for your emergency fund trades in monthly living expenses rather than in monthly income. For good reason, too. If you follow a balanced budget, your expenses will be less than your income, so saving this amount will be easier than if covering your entire paycheck.
More importantly, it helps you carry on with your life, paying bills and buying groceries, even if you lose your job. In the worst-case scenario, your emergency fund can fill in for your income so that you can cover your living expenses.
When calculating your living expenses, be sure to include your discretionary spending. After all, dealing with a reduction in pay or job loss is hard enough without also cutting all the fun stuff out of your day. By saving for discretionary spending, you can still indulge in streaming services or dinner with friends without agonizing over your budget.
Building Your Emergency is a Long-Term Goal
Saving money can take time, even if you choose the smallest benchmark of three months. Most people take multiple years just to save a single month. Unfortunately, unexpected expenses operate on a faster timeline. Half of all Americans face at least one unexpected expense every 90 days.
The stark reality is you might not have enough cash sitting in your emergency fund by the time your next unexpected expense rolls around.
To handle these emergencies, find a fast, convenient, and reliable lender that offers installment loans online. Knowing where to look for installment loans online means you’re never far from emergency fast cash.
You can visit a site like MoneyKey to see what it takes to qualify for an online installment loan. Applying is easy, and approved funds will be deposited directly into your account.
3 Ways to Grow Your Emergency Fund
If all goes well, you won’t need fast cash in an emergency. Instead, you can focus on building your emergency fund from scratch without distractions. It’s as simple as following these three rules of thumb:
- Open a high-yield interest savings account to earn more on your deposits.
- Budget so that you always save every month, without fail.
- Automate your contributions so you don’t even have to think about saving.
An emergency fund gives you the tools to fight back against the unexpected. So, start saving in the new year. Good luck!