Why You Need an Emergency Fund (and How to Start One)
What gets in the way of accomplishing financial goals?
Picture this: you’re chugging right along making all the right moves to achieve your financial goals then… BAM! Something happens (A car accident? A root canal?) and you must come up with some cash to deal with it. You need emergency savings to handle unexpected situations and expenses. Otherwise, a little problem can turn into a big setback.
How much do I need in my emergency fund?
Don’t know how much should be in your emergency fund? That’s okay. Start with a simple solution (that is sure to help you sleep better at night).
Our friends at Nerdwallet have an easy calculator to help you figure out a target emergency fund based on your monthly expenses. Now, if that amount makes you scream and toss your computer across the room (don’t do that), you can always start with this approach: add up the amount of all your insurance deductibles (medical, car, renters/homeowners) and set that as your baseline for your emergency savings account. Having the money to cover your deductibles means that, in the event of a serious emergency like a car accident or injury, you can cover the deductible without going into debt.
Being able to cover your deductibles is a great start. With this approach, you’ll be able to deal with the most common financial emergencies. An emergency fund of just $500 will help you feel more prepared and less panicked if an emergency hits.
Saundra Davis is a nationally recognized financial coach and educator. Her experience in the U.S. Navy, where she made every money mistake possible, and her 20 years serving community-based organizations led her to the reality that the best way to help people find a path out of poverty is to help them become their own financial expert.