Financial specialists stress that everyone should have an emergency fund for unexpected and costly expenses. You should have enough money to cover between three to six months’ worth of expenses. For some, it can mean having to compile a huge amount of cash, which can discourage even the most efficient saver.
But don't worry if you haven't set up your emergency fund yet. We've found that even wealthy people who make a lot of money can't always absorb unforeseen expenses.
With nearly 30% of American saying they don’t have enough or any emergency savings, according the chart below, establishing an emergency fund is not easy without the proper planning.
To help you get started on your emergency fund, here's a list of the top five effective steps to creating your emergency fund.
Establish Many Small Saving Goals Instead of a Single Large One
Get it right from the beginning and instead of aiming to save enough money for three months' worth of spending, target one month.
Even two weeks will do. It's up to you to set a goal you consider realistic. Once you've reached that first target fast, you'll feel motivated to keep going in the right direction.
Establish your second goal at a higher level and increase the value once you hit it. Saving money will become more natural to you. The motivation you've built up along the way by hitting the smaller targets will push you forward toward your goal.
Upgrade Your Money Saving Goal over Time
After you’ve established your initial fund, now you can set a long-term and larger target for your emergency fund. But consider that you may need to access the fund at some point during the process.
The least amount of cash you should account for is three months' worth of expenses. Once you have that covered, the value depends on your specific situation, but you must determine and stick to your personal monthly savings goal.
Identify the Best Financial Instruments to Help You Save Money
An emergency fund is a living dilemma. It's a large sum of money available at anytime, but most financial advisers say that letting cash sit is counterproductive. So, keep three months' worth of cash available in your savings account and invest the rest.
Look for low-risk investments to capitalize on. Consider short-term certificates of deposit (CDs) or securing a money market fund. And if financial emergencies do occur, you can easily access these accounts after paying the penalty.
With most Americans feeling confident in the economy, according to the chart below, now is the ideal time to start identifying additional saving opportunities.
The best way to save money is by never even touching it. You can ask your human resources manager to transfer part of your salary to a deposit account. But if your employer can't help with a direct deposit, speak with a financial advisor for the best saving method.
Determine a monthly amount of money for your emergency fund account and open a savings account rather than a checking account and let time enhance your savings naturally.
Don't Raise Your Monthly Expenses or Contract New Credits
After you've automated your savings, don't imagine that you're secure. Don't let your old spending habits return. If you're not dining out weekly at a fancy restaurant, but you're spending excessively every week, you're not saving at all.
If you still have an extra $100 each month, consider adding it to your savings account. But, if you don't have that extra cash, you might be overusing your credit card.
Find a balance and keep its importance in mind. You must be realistic but also try to cover your final savings target as soon as possible.
Your Emergency Fund Is the Ultimate Safety Net
Having an emergency fund for you and your family can help guide you to a stronger financial situation, while also benefiting your long-term financial targets.
To help clients establish an emergency fund to protect against unforeseen events, consulting with a financial advisor, like Matt Logan, can help steer prospective clients toward a savings and investment strategy to help achieve the ideal emergency fund for each client.
Matt Logan has vast financial experience to help every client maneuver through the challenges of saving and establishing an emergency fund. If you’re in need of better financial planning or looking for better investment strategies to help your emergency fund planning, Matt Logan has proven financial techniques geared to fit any financial situation.