Want to know the best way to avoid going further in debt? Have an emergency fund. Experts recommend having three to six months of your monthly expenses set aside as an emergency fund. These are funds that are easily accessible, such as in a savings account.
Yet according to the 2012 National Financial Capability Study, 56 percent of U.S. residents do not have any savings for emergencies, and 75 percent could not cover an unexpected expense of $2,000.
Do you feel that saving three to six months of expenses is out of reach for you? You can accomplish it over time by regularly putting a portion of each paycheck into your savings. For example, if you put $20 each week into savings, at the end of one year you would have $1,040 in savings. Increase the amount to $25 and you will have $1,300.
Consider this scenario: You have $1,300 in your emergency fund. Your car breaks down and the mechanic says it will cost $500. Your first response is to wonder if you have room to put it on your credit card. Then you remember, you have an emergency fund and you don’t have to use credit to pay for the repair. What a wonderful feeling to not have to worry about how you are going to pay that bill. What was the cost of that peace of mind? $25 a week, the cost of getting a daily coffee on your way to work.
Let’s say you’ve been working on that emergency fund for some time and now have six months of your expenses saved. You go to work and find out you are being laid off. Your initial reaction is to wonder how you are going to pay your bills. Once again, you remember you have an emergency fund. Six months should be plenty of time to find a new job. With unemployment benefits and/or severance pay, your emergency fund could last even longer.
Having a fully funded emergency fund helps you avoid debt and gives you peace of mind when those unexpected events and expenses arise.
Need more information on emergency funds? Contact us at [email protected] or 402-502-0250.Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.