When you think of an emergency fund, you might think about saving for unexpected expenses like your car breaking down or your dishwasher blowing up. But if you have your budget set up correctly, you already have money set aside for those surprise expenses. And while you can also work it into your budget, the emergency you need to save for is the loss of income.
If there was a lesson to learn during the 2020 pandemic, it’s this: You never know what will happen, and your job could disappear overnight. You can’t prepare for every emergency, but setting aside a decent chunk of money to carry your household if you lose your job is not an option — it’s essential.
But an emergency fund is different from your regular savings, and you want to be clear about what you need.
What’s an Emergency Fund?
To put it simply, an emergency fund is a lump sum of money set aside to replace your income for a while. When you create that emergency fund, you want to put it in a place that you can only access in a true emergency. In other words, make it difficult but not impossible to reach.
How Much Do You Need?
The rule of thumb is that you need three to six month’s worth of expenses in savings for your emergency fund. So, if it takes $2,000 to keep your home afloat, you need at least $6,000 to $12,000 set aside in case you lose your income.
If you haven’t saved any money, this amount might seem impossible. But keep in mind that saving takes time, and if you’re consistent with it, you can reach that milestone.
How to Build Your Safety Net
The best way to build this amount of savings is to immediately move a set amount of cash each time you get paid. If you never see the money, you’ll learn to live without that extra cash. Put your money into a high-yield savings account until you have a decent amount to invest in something other than cash.
Talk to a financial advisor who will help you decide where to invest your savings so that it will multiply quickly. That said, don’t invest this money is anything high risk because you could lose it all.
Focus on Your Debt
Credit card debt will bankrupt you faster than any other loan out there, so pay them off as quickly as possible. If you have any big-ticket item loans, you want to continue your payments in full and on time.
With installment loans in New Mexico or anywhere else in the country, you don’t want to miss a payment and default. Setting up an emergency fund will ensure that you can continue to pay your mortgage and car payments, even when you don’t have a job. Paying your debts will keep your credit score up, secure your home, and prevent any vehicle repossessions.
An Emergency Fund is a Necessity
Setting up an emergency fund is not an option. Most people are one or two paychecks away from living on the street, and that reality is frightening. Don’t worry about what would happen to you and your family if you lost your job; prepare yourself for the possibility. Three to six months is plenty of time under normal circumstances to recover and find another income source to replace the one you lost.
Any number is better than zero, so start saving today and stay the course. Before you know it, you’ll have a piggy bank that’s deep enough to carry your household through hard times.