Emergency Funds – Planning For The Unexpected
Understandably, many people prioritize paying down debt over establishing a savings account that includes an emergency fund for the unexpected situations that life sometimes presents. While it’s never a bad thing to plan ways to pay off your debt, emergency funds are just as important and often overlooked.
Consider how you got into debt in the first place — you had unforeseen expenses that created an immediate need for money so you took out a loan or charged a credit card to take care of business. Imagine not having to worry about doing that, and being able to dip into a savings account for small emergency expenses when necessary. That’s the goal of an emergency fund, though for some it might not be at the top of their to-do list.
Step By Step
When weighing your options in regard to paying off debt and establishing an emergency fund, it’s important to consider your finances and just how much you need to allocate to each thing. The smartest thing to do for most people would be to start by saving a small emergency fund, taking around $1,000 and setting it aside for unforeseen expenses.
One smart way to keep your emergency savings in check while balancing debt is to halt any debt repayment whenever you have to dip into the emergency fund. Give yourself time to build the fund back up before you resume paying down your debt. Once you decide to pay it down, it might be worthwhile to look into refinancing it with a balance transfer that has a low interest APR.
Next, you should really focus on saving money. Once retirement begins, you’ll need money to have for security purposes as well and to live off of. Even before retirement, though, saving money is key. It’s said that you should put anywhere from 10 to 15 percent of your pay into savings.
The last thing you can do is come up with a debt repayment plan. You may have to make some sacrifices such as lowering your living expenses, but you could also increase your income by taking odd/side jobs and coming up with creative ways to make money. Cutting living expenses is easy, as all you really need to do is pinpoint areas of your budget that can be cut in order to save money for paying off debt. Even something as small as canceling a gym membership and putting that money towards repayment can make a huge difference in the long run.
How To Start A Fund
When opening a savings account, you’ll need some money at your disposal to be able to have something in the account as a starting point. You don’t necessarily have to take this money out of your regular income, though.
Finding a second job, selling unused or unwanted items and cutting down on spending at the grocery store by half are all easy ways to obtain quick money that you can use to establish your fund.
Find What Works For You
The most important thing when trying to strike the balance between debt repayment and emergency saving is to find a system and a ratio that works for you. Some people like to start with a flat amount taken out of their income as a starting point for emergencies, then use 75 percent of their income for high interest debt repayment and 25 for your emergency fund.
No matter what method or organizational route you take when it comes to balancing both things, it’s important to figure out what works for you and prioritizing accordingly.
Perhaps the most important thing you can do is to avoid the temptation of using your funds for non-emergencies and/or fake emergencies. For example, going to a store and seeing something on sale that you want — choose to sacrifice the thing that you want for your genuine needs as well as preparedness for the onslaught the following day.
When you can find a good balance and be able to have room to breathe while organizing your debt and putting money aside for unforeseen expenses, you’ll feel that much better about your financial situation and it’ll save you some real heartache in the long run.