EMERGENCY….. Fund. Your First Savings Goal
Why to Start Saving
It’s a common story that we’ve all heard at some point about a friend or someone we know. Things were going okay financially for this person. They had a good job, made a decent living, but most months they were finding a way to spend most of their earnings. Their employer provides a 401k matching program so they were putting in 4% of their salary with their employer matching 4%, so they felt like they were saving money each month. And at this rate, they were technically saving 8% of their income into a retirement account each month, which overtime could add up to a size-able nest egg. This is great until they end up with a need for a few thousand dollars really quick….
Maybe he or she was laid off from that good job due to company downsizing, or they broke their leg in a skiing accident and had to pay a $5000 health insurance deductible. Even more common, their 5-year old car might just have had the transmission die one day, and it needs to be replaced for $4000. No one ever thinks it will happen to them. What to do?!?
The Emergency Savings Fund
One of the first savings goals that I came up with once I made a budget and started putting away a set percentage of my income each month was to create an emergency fund which would hold at least 3-6 months of living expenses. Whether its a job loss, medical bill or home/car repair, there comes a time for everyone that we need a money quick to pay for a large expense. It may seem like a lot of money just sitting in a savings account not doing anything, and hopefully we’ll never need it, but an emergency fund is the first step to a financially secure life.
In order to figure how much you’ll need just add up your total monthly expenses from your Budget and multiply that number by 3 (3 months of expenses) if your confident you won’t need much, or 6 (6 months of expenses) if you want to be conservative. If you own your own home or have a family, it would probably be best to go for 6 months of expenses due to the greater likelihood of unexpected costs popping up. This amount of money is how much you should aim to save up in a cash savings account for unexpected costs. You’ll want to keep this separate from your day-to-day checking account as you don’t want to be tempted to dip into this cash if you don’t need it!
How Long Will It Take Me to Save That Much?
The more money you save each month then the quicker you’ll be able to build up your Emergency Fund. Here’s a quick equation for you number geeks out there (myself included):
(Number of Months Expenses Needed) / (Savings Percentage) = How Many Months to Build Your Emergency Fund)
Example: (3 Months of Expenses Needed) / (30% Saved Each Month) = 15 Months or 1 Year and 3 Months
(3)/(0.30) = 15
So you can see that this is no quick task, and it will take you some time to build up this amount of money. However, you can always speed this process up by increasing your savings percentage each month, even if it is just temporarily until you have the safety net of an Emergency Fund.
No one thinks that they will have an unexpected bill come up in their lives, and most people have less than $1000 in their savings account. However, it’s not too late to start, and in most instances after only 6-12 months you can have a comfortable amount of money saved up for a rainy day. So don’t hesitate, start now!