One of the quickest paths to financial ruin is to incur an unexpected financial strain such as medical bills or a car breaking down and having to borrow money, whether in the form of a loan or by using a credit card, in order to pay for it. Luckily, there is a solution. Having an emergency fund for cases just like this is the perfect way to avoid these slippery financial slopes. So, what is the best way to begin an emergency fund this year?
Set A Budget and Stick to It
The quickest way to ensure that you will have extra funds to start an emergency fund is to first create a budget. If you don’t already have one and then start sticking to it. You will be amazed at where your money is going once you take the time to sort everything out. Once this is done, you’ll clearly see where some savings can be found which can instead be rolled over to an emergency fund moving forward. One key idea to help you get started with your emergency fund is to pretend that you are already in an emergency. What would you have to cut out? Then start living frugally pretending to pay off the “emergency” but actually putting the money into your emergency fund. Paying off a pretend emergency is much less stressful than paying off a real emergency, so when the unexpected expense arrises you will already have the money set aside and have much less stress.
Start Small with Your Goals
Most emergency funds are lofty goals of up to six month’s worth of expenses. This can often seem like a daunting goal that’s simply too large to even begin. To avoid falling into this train of thought, start small. Begin by figuring out how much you typically spend in one week and make this your first goal. Once you’ve accomplished this goal, shoot for one month, then three months, then six. Breaking down the larger goal into many smaller ones will help you stay on track.
If you need to free up more money to be able to put into savings you should try a snowball effect. Pay the lowest debt first. Once you pay it off then you’ll have that amount opened up in the budget to go towards the next biggest debt. This is when the snowball effect happens and how you can quickly free up more money away from debts and towards savings.
Anticipate That Things Will Break
Very rarely do households go an entire year without an unexpected bill. Whether the dryer breaks down, the water heater springs a leak or you get an unexpected transmission repair bill, unexpected bills happen. The sooner households realize this, the less strain on your budget when they do happen. Emergency funds take much of the stress out of this inevitability. Remember just because you have all your regular expenses covered doesn’t mean you get to spend the rest. Unexpected bills still need to be part of your budget.
Reward Yourself Upon Completion
Reaching a fully-funded emergency fund is truly an accomplishment. Once this has been reached, be sure to reward yourself upon completion. This can be a nice dinner out with your family or even a weekend getaway with a loved one. If you’re saving with this reward in mind, you are far more likely to reach the goal.
Guard Your Family Emergency Fund
Be sure to clearly define what consists of an emergency so you don’t go tapping into it because you “need” to go out with friends. That is not an emergency. Things outside your budget that break unexpectedly are an “emergency” like an unrepairable tire because you hit something that slashed the sidewall. But technically new tires, because they are worn out, should actually be planned for in your budget. It is no surprise that tires wear out, they have a limited life expectancy.
When an emergency does arise and you have to tap into your emergency fund be sure to replace it as quickly as possible. You might think of a family emergency fund as your own “private bank” that you can borrow from in case of an unexpected expense. You might even want to pay yourself interest on the money you borrow from your emergency fund. This could actually help you to repay it faster.
Unexpected expenses happen, but they don’t have to cause an “emergency”. With a fully-funded emergency fund, you and your family can be better prepared to weather the storm with a lot less stress.
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