Preparing for Financial Emergencies
Preparing for Financial Emergencies
Preparing for financial emergencies before they happen.
While many people, regardless of age, find saving money to be challenging, establishing good savings habits is a key part of achieving your financial goals. A solid savings strategy should include dollars earmarked for emergencies. Being prepared for unexpected expenses, which are bound to happen at some point in your life, may lessen the burden on your budget. In addition to setting aside money for financial surprises, your savings plan should also include allocations for short-term goals like vacations, middle-term goals such as buying a home or vehicle, and more long-term goals like retirement.
Define “financial emergency”
Just as your financial journey is unique, so may be your definition of a financial emergency. In general, a financial emergency is any circumstance in which you can’t live your normal life unless you spend a significant amount of money to fix the situation. Examples might include: car repairs, health issues or a family member experiencing a loss of income and you needing to compensate for their lost wages. All these are financial “needs” which must be addressed.
While it may be easy to justify an expense as an ‘emergency’, buying the newest phone, taking a last-minute vacation or splurging on a new wardrobe are “wants” and, therefore, not usually financial emergencies.
Ask yourself: Is it unexpected? Is it necessary? Is it urgent?
If your answer to any or all these questions is yes and the cost is more than you have on hand or in accessible accounts, then it would be considered an emergency, and you can tap into your emergency savings account. Doing so allows you to track these expenses separate from your other savings goals. If you find you need to tap to your emergency savings to cover an expense, remember to replenish the account as soon as you are able.
How You Build Your Emergency Savings
Building an emergency savings account can take time and patience, especially if you are just starting out. But setting aside even $50 or $100 a month and forming good financial habits can get you close to your emergency savings goal in a few short years. Here are a few tips that can help you fill that emergency savings bucket quickly.
- Make a budget and stick to it.
- Set a monthly emergency savings goal.
- Apply a portion of any raises or bonuses to your emergency savings account.
- Evaluate your expenses, especially those that are on auto-pay plans, like subscriptions. You may find that your idea of needs and wants change over time. Apply any amount saved to your emergency savings account.
- Turn a hobby or a passion into a side hustle to generate extra income.
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