Having a sound and solid financial emergency plan can very well be the difference between saving the day when the misfortune hits you or diving nose-deep into the financial catastrophe. To avoid the latter from ever becoming a reality, we’re going to share a couple of tips on how to prepare for the unknown disaster and what to do if it happens:
Setup an emergency fund
An emergency fund is basically a separate bank account where you store the excess money you have. But make sure you don’t give into the temptation of also using it as a college fund for your kids or savings account for a new car. An emergency fund should only serve one purpose: being a safety net that helps you overcome a difficult financial situation. You should only withdraw funds from it in case an emergency hits you over the head and you can’t overcome it with your typical monthly budget.
What’s the right type of bank account for your emergency fund?
Ideally, it should be a normal bank account. The problem of having your funds tied to an investment program is that you lose the freedom to withdraw them at any time since you may incur a penalty for doing so.
How much to put into the savings account every month?
That entirely depends on you and your financial capabilities. But as a general rule of thumb, you should start slow and only make a small deposit each month, consisting solely of the excess spending money you didn’t get to use up. For starters, even having an emergency stash of $500 is a respectable goal. By putting nothing more than $50 towards it at the end of every month, it’s going to take you less than a year to reach your goals.
Ways to put more money towards your emergency fund
If you’re spending your money on luxuries you don’t really need (expensive restaurants, coffee shops, magazine subscriptions, extra clothes, etc.), cutting back on your spending will net you additional funds you can put towards your emergency fund. Note that the trick lies in cutting back on your spending just a little bit, there is no need to let go of it completely. A dollar here, a dollar there… you won’t believe how quickly this can make a huge difference.
What to do in case of emergency
Try to avoid withdrawing the funds from your emergency savings account, unless absolutely necessary. Should the situation call for it, however, do not be afraid to make a withdrawal. But no matter what you do, make sure you give it your best effort to replenish the emergency savings fund as soon as you make a financial recovery.
Knowing that you can always get a loan if need be is also a great stress-relief, but only if you can count on getting approved and receiving the funds quickly, which can only be said for a handful of service providers. For example, you can get approved on King of Kash now, no matter what your credit score might suggest, so it’s best to stick with the ones that have a similar policy.
Now that you know what to do, have you already figured out how to allocate some of your monthly budget towards building up an emergency savings fund? If not, get to it right away!