Money Management Tip: Set Up an Emergency Fund
If you're still thinking "It'll never happen to me," then it's a good thing you're reading this article.
A part of you might think setting up an emergency fund is a little melodramatic. So far, luck has been on your side, and you haven't had an accident that's put you out of commission. Not yet, anyway.
Still, a million and one things could happen that set you back financially. That's why having an emergency fund is probably one of the best money management tips out there.
Forced Out of Work
Lloyd Phillips, a freelance web developer and marketer, wrote a story on his blog, The Extra Income Project, about why he decided to build up an emergency fund. Unfortunately, his commitment came after suffering an accident that forced him to take time off work for nearly a year.
About eight years ago, Lloyd was playing with children in the living room and, while "engaged in [his] role as the scary monster" he slammed his head on a low beam that ran through the middle of the ceiling.
The next day, Lloyd couldn't walk, was slurring his words and couldn't tolerate bright lights or excessive noise. He had suffered a severe concussion, and had to take four months off work. As a result, he had to freeze his mortgage and live on credit cards for an undisclosed amount of time.
Lloyd's story is one of millions. Bad things happen, so it's best to ensure you're prepared to handle them. How can you save up for an emergency fund?
Tips for Setting Up and Emergency Fund
First thing's first: Create a separate savings account for your emergency fund. The money in your primary savings account is for any short-term financial goals you may have in sight: buying a car, taking a vacation, and other things like that. A second savings account will help you keep track of your financial cushion.
Second, stick with a manageable schedule. Between paying off a car, keeping up with rent and staying on top of the utilities, you shouldn't burden yourself with putting $300 into your emergency fund every month. Start with something manageable, like $75. In 12 months, you'll have $900.
That number may not seem like a lot, but over time your $75-a-month schedule will start to build up. In addition, if you ever get a raise, a bonus or pay off one of your existing debts, you can always put more into the account.
How Much Should You Put in Your Emergency Fund?
The quick answer? It depends on your situation. LearnVest contributor Julia Chang recommended that married couples should save six months worth of take-home pay of the highest earner. This rule is especially applicable to people who have kids to take care of.
However, if you only have to feed yourself and don't have a mortgage, Chang recommended saving 3 months worth of take-home pay. So, if you pull $3,000 after taxes every month, you should consider saving about $9,000.
This article isn't intended to make you panic. However, you should be prepared for unexpected events that could set you back.