Why You Should Have Savings for Unforeseen Events & How to Get Started
Do you have an emergency fund for when the unexpected happens? It may be hard to believe, but only 39% of Americans can afford to pay $1000 dollars for unforeseen expenses. Putting a little money away for a rainy day isn’t always easy. However, to avoid been stuck in a crisis, creating a financial safety net is worth thinking about and setting up.
You may have some good intentions when it comes to budgeting, but sometimes at the end of the day, there isn’t any money left for an expense you didn’t expect. For many people, without intentionally saving money, the income they make is spent before they know it and there aren’t any funds left to cover any extras.
That’s why it’s important to acknowledge some hard truths about life. Like, what would happen if you or your loved one is unable to work because of an accident or illness? Or what if some unexpected expenses come up that you don’t have money put away to cover the cost?
For these unforeseen circumstances, it’s important to have your finances in place to make sure your bills would continue to get paid and your family would be taken care of. If you don’t have a rainy day fund set up, now is the time to make that happen. But where do you actually start?
What Factors Should You Take Into Consideration
What should you consider an emergency or unexpected expense?
It’s just a matter of time before the inevitable happens. Your car starts experiencing problems or your washing machine decides to call it quits. Maybe your doctor thinks you should have elective surgery to correct an ailment you’ve been dealing with.
Then there are the more long-term events that affect your income over time. Such as you or your loved one losing your job for a few months or you get into an accident that prevents you from earning a living.
All of these are the type of unexpected expenses that you could have to deal with at some point in your life. It may be a one-time expense that doesn’t break the bank or an extensive need for income that you aren’t able to obtain through working.
Planning ahead for possible expenses
So as you can imagine, being prepared as much as you can for unforeseen expenses is your best bet for being able to handle when life throws you a financial curveball. Instead of waiting for such a situation to come up, you want to do your best to anticipate possible expenses and plan for them..
For example, if you’re driving an older car you can expect that at some point it will need repairs. Appliances don’t last forever and can be quite expensive, so it makes sense to start saving up to eventually replace them when they give out.
In addition, you may also want to do research for good deals on replacements and reliable services. It would be unfortunate to have your car towed to a random mechanic just to have to pay more to have the car moved to somewhere else. So try to keep a proactive list of businesses and services that your friends & family highly recommend that you can easily refer to during a financial emergency.
Is it worth using your emergency fund on?
Whenever you have to consider using your savings, you always want to ask yourself some questions about using the money:
- Do you need the item right away?
- Should you repair or replace the item?
- Do you have a similar item that could serve the same purpose?
- Can you get help or borrow from someone?
- Is there another possible solution that could save you money?
For instance, if it’s the dishwasher that broke you should evaluate if it would be less expensive to repair than replace. Or maybe you don’t need a new one right away because you can do the dishes by hand.
If it’s a transportation issue, can you rideshare, take public transport, or even ride the bike you have sitting in your garage. Even if it isn’t the perfect solution, it may get you to work until you can save up for a different car.
Nothing helps you sleep better at night than knowing you have money tucked away for an emergency.
greg Mcbride
How to Start Putting Money Away for Your Safety-Net
The best strategy for addressing unexpected expenses is to actively create a financial safety net with an emergency savings fund. Having three to six months’ worth of living expenses tucked away in an interest-bearing account is a good beginning.
To determine what you would need in your emergency fund, first figure out what your family needs to comfortably live on if all income stops. If you don’t already have one, come up with a budget that lists all your necessary expenses.
Then determine what left over money from each paycheck you can contribute to your safety net.
Next, set up a savings account and add to it based on a consistent schedule. Then start saving as much money as you can until you have built up this safety net.
Remember to use these funds only for completely unexpected expenses. Make sure you know what’s in the account. And once you have to take money out of it replace it as quickly as possible.
So let’s recap:
- Create a budget
- Decide where you can cut back on unnecessary expenses
- Figure out where you can create additional income to contribute
- Determine what amount to contribute and how often
- Set up a savings account
- Add to the funds on a set schedule
- Only use your safety net for unexpected expenses
- Re-evaluate your savings fund on an annual basis
- Replace any money used as quickly as possible
Where will the money come from?
Put the money you usually spend on going out to eat, going to the movies, buying the newest gadgets, and put that extra money into your savings account until you’ve saved enough to have a comfortable cushion. Make this step go even faster by putting any bonuses or tax refunds into your financial safety net as well.
How to add to your savings through investments
Once you have those two parts of your safety net firmly in place, consider investing any additional savings into a higher interest-bearing account.
While you may not be able to access any money invested here right away, it will come in handy when you’re dealing with a long-term financial emergency or are ready to retire.
The plus side is that there are plenty of investment vehicles out there that will get you a much better return than your plain savings account at the bank. Talk to your financial adviser and come up with a plan that’s right for you, your family, and whatever the future may hold.
Remember to re-evaluate your savings strategy
Don’t just stop there. Make it a goal to add to your safety cushion as you can and come back and revise your numbers from time to time. Your living expenses may go up or down over time and you can adjust how much you need to set aside in quickly accessible money accordingly.
Once your bills and credit cards are paid off, do what you can to get that emergency fund set up. Because you know something else will break down the road
What To Do When the Unexpected Does Happen
How to build your financial safety net back up
This brings us to a good point. Here’s how to recover quickly after that purchase. Go over your budget (the one I recommended you create) and determine where you can temporarily cut back on some expenses. Maybe you stop eating out on the weekends or cut back on your clothing or entertainment allowances.
Use the money you’re not spending for the next few months to refill your emergency fund. For an extra boost, work a few hours of overtime, do a few freelance projects, or temporarily pick up a part-time job to get back on track fast.
What if you don’t have enough savings to cover the cost?
But what do you do when the expense comes up before you had a chance to set up the emergency fund? Take a deep breath and assess the situation.
Can you make do without the item for a little while? Just long enough to scrape together the funds to repair or replace it. If it’s the dishwasher, that’s easy. You can wash dishes by hand for a little while. If it’s the refrigerator or the vehicle you rely on to get you to work each day, then you need to set those as a priority.
Maybe you can shuffle your money around and put off some other expense for the time being. If it really comes down to it, and there is no other option, charge it to the credit card. Then after, your main goal should be to pay off that credit expense as soon as possible. If you stick every penny of your discretionary income in paying your balance down, it hopefully won’t take you long.
Considering Insurance to cover the extensive expenses
Life and disability insurance are another important part of your financial safety net, as is your retirement money. Do you have a plan in place to continue to cover your living expenses (or those of your family) when you can no longer work? Call up your insurance agent and go over your current coverage. Make sure the insurance you’re paying for will pay out what you need and if not, make adjustments.
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