New transmission . . . a phrase I did not want to hear. I had better ideas to spend that money I’ve been saving, but suddenly there was another need.
There is not a lot you can do to prepare for things like your transmission going out. It just happens. But, what you can do is prepare financially to make the blow less of a punch to the stomach and avoid having to use a credit card to fix the problem.
If you are wondering how to go about saving for an emergency fund, here are the answers to four questions you might have.
What is An Emergency Fund?
Car problems, medical expenses, family emergencies, unemployment, all of these different experiences require you to have money to cover the expenses. Like it or not, these unexpected events are going to come up.
The Simple Dollar defines an emergency fund as money you have saved for the sole purpose to maintain your day to day life in the event of an emergency. You emergency might be unemployment where you will need to rely on using the money to survive until another job is found, or it could be a large onetime expense.
We had the transmission go out twice in six months on one of our older vehicles. The first time, we were fortunate enough to have the money set aside to fix the problem. The second time, we decided to cut our losses and just get rid of the car and look into a newer car.
How Big Should Your Fund Be?
Experts agree that a safe amount to have set aside in an emergency fund is three to six months of your income. This amount means you will have the necessary amount needed to make your payments and have what you need to survive in the event of a job loss. That being said, setting aside three to six months of an emergency fund is not an easy thing to do.
Dave Ramsey suggests starting out planning to have $1,000 saved. He suggests getting that money saved as quickly as you can. Do what you need to get that first $1,000 saved – stop eating out, sell some unused items, get rid of cable or get rid of your expensive habit of smoking or drinking coffee and soda.
If $1,000 seems daunting to you, start smaller. Find an amount that is large enough you have to work to save it, but small enough that it won’t take you a year to reach your goal. Whatever your number, start today!
Where Should You Keep Your Fund?
Once you have the $1,000–or the target amount you wanted to have saved–find a bank, open an account and put the money in the account. Don’t put it in your sock drawer or under your mattress; put it somewhere you can’t get your hands on unless the emergency comes. Eating out or buying that new shirt is not the “emergency” you want to be spending this money on.
When you are choosing an account, be sure to find an account that has competitive interest rates, but one that you won’t get penalized for if you need to withdraw the money. The idea for an emergency fund is to be able to access the money exactly when you need it without being hit with fees.
Set up automatic withdrawals so money is continually being added to your emergency fund without you even having to think about it. Even if the amount is just $50 a month, when an emergency comes, you will be glad to have some money saved.
Should You Use a Credit Card to Cover the Costs?
When an emergency comes up, we are all tempted to put the amount on the credit card and forget about it. If I had used the credit card to pay to fix our transmission, there is a good chance I could have still been working to pay that off. With credit card interest around 18%, just making the minimum payments, I would have paid the $2,500 for the transmission and almost $700 in interest. Instead, I used our emergency fund and paid that $700 back into our emergency fund not on credit card interest.
The Simple Dollar says the biggest mistake you can make is putting things on a credit card that you don’t have money in your account to cover. Obviously, there are times when you might have to use your credit card, but having some money in a fund set up specifically for emergencies will make it easier to cover the unexpected expenses.
Start Small, But Start Now!
There are numerous ways to spend or invest your money. Forbes says that your first priority before you start paying off debt is have that $1,000 saved and to find a way to add a little to the account each month. If you don’t have an emergency fund, when the emergency comes, you will be forced to go even deeper in debt. Set some money aside today to help weaken the blow when the emergency comes. Don’t think in terms of “if,” instead think in terms of “when” and start working today to be prepared.