Why You Need An Emergency Relief Fund
Have you started building your emergency relief fund yet?
No?
Well imagine that you have finally managed to get your spending under control, and you’ve found a budget that works for you.
Then this happens…
Your son breaks his leg in three different places during football practice, and you’re suddenly hit with mountains of unexpected medical bills.
Listen, financial emergencies can happen at any moment, and if you don’t have an emergency relief fund, you could face serious consequences.
For instance, unexpected expenses can make you break out those credit cards you just paid off, take out loans, or even cause you to dip into your retirement accounts. When that happens, you might find yourself in a cycle of debt all because you didn’t have money saved up for emergencies.
Examples of financial emergencies:
Urgent and unexpected medical procedures
Unemployment
Sick pet
Elderly family member falls ill
Unforeseen auto repair
Unforeseen and emergency home repairs
What is an Emergency Relief Fund?
An emergency relief fund is basically money set aside for unplanned expenses.
If you’re not properly prepared, when a financial emergency hits, you could end up in a sea of debt, or worse – bankrupt.
Unfortunately, this is the case for most folks...
56% of Americans can’t cover a $1,000 emergency expense with savings.
That is crazy considering how easy and quick $1,000 can actually be spent.
Don’t let this happen to you…
Financial emergencies are unavoidable – so if you haven’t already, it’s time to start building an emergency relief fund right away.
How Much Money Do You Need
There is no one-size-fits-all answer to how much you should have in your emergency relief fund.
But a general rule of thumb is to have at least 25% of your monthly budget dedicated to this account.
Having at least 3 to 6 months of emergency money is considered one of the most realistic goals. This way, you won't have to worry about finding cash on the same day, ever.
What your emergency relief fund should look like…
3 Months: If you’re single with no dependents, at the very least you should have enough to cover three months’ worth of living expenses. If your monthly costs total $2,500, then your starter emergency fund should have $7,500 in it.
6 Months: If you have family or folks who are financially dependent on you, then you should have enough set aside in your emergency relief fund to cover six total months of living costs.
12 Months: What’s the best-case scenario when financial emergencies hit? You have twelve months – an entire year – worth of livings costs saved. That means, if you have an unplanned expense come up, you don’t have to worry about being back at zero.
However, if you don’t have 3 to 6 months of your salary set aside for an emergency, you can start today by just setting aside a little bit of money. Really, any money you can realistically put towards financial emergencies is crucial.
Keep in mind, it’ll take some time to build up your emergency relief fund, but you should establish this goal as quick as possible.
That way, when a financial emergency does happen, you’ll be prepared to face it.
How to Set Up An Emergency Relief Fund Today
When someone wants to save for a financial emergency, most people don’t know where to start. So, let’s take a look at the steps you can take today…
1. Assess your situation
Look at the following questions to see if they reflect your current situation:
Are you currently working for yourself or your own business?
Are your current bills organized, categorized, and comfortably paid for each month?
Do you have money left over after paying essentials?
Do you have a chunk of savings already saved somewhere, and if so, is it in a regular savings account?
What other financial responsibilities do you have? Can they change?
2. Figure out your emergency fund goal
Determine the size of your budget (your net income and where your money is being allocated and spent). Then determine how much you can start “spilling” over into an emergency fund.
For instance, if your budget is $4,000-$5,000 a month, then set aside $1,000 as a good starting point. If your budget is higher, aim to set aside $2,000… and so on.
Remember, a good place to start is placing at least 25% of your budget into your emergency relief fund. Now, this is for starters and can help cover small emergencies.
3. Use direct deposit to keep you on track
Setting up a direct deposit amount for your emergency relief fund can be one of the most efficient ways to keep your fund on track. This will help you keep your emergency allocation separate from other savings. And can also come in handy for those who don’t have the self-discipline to set the money aside manually.
4. Start increasing your savings
Once you’re on a steady path with your budget, re-asses where your “extra” money is going and if there is money you can be putting away for financial emergencies instead of other savings or spending.
Did you receive an unexpected bonus from work? A small inheritance from a relative? Or any unexpected income? Put that toward your emergency relief fund right away! Since it’s unexpected money, it’s money that you have not allocated into your budget, so without hesitation - throw it directly into your emergency relief fund.
Where to Stash Your Emergency Relief Fund
So, now that you’ve built an emergency fund, where should this money “live”?
First, I’ll tell you where it shouldn’t be – sitting in your checking account, the same one you use to pay your day-to-day expenses. This method is the easiest way to spend your emergency funds without even noticing it. So, please, don’t do this.
Here’s where you should stash your emergency relief fund: in a separate savings or checking account dedicated just for emergencies. (Even better if you use a different bank altogether for this.)
This will come hand-in-hand with the direct deposit you created. You can choose the amount you’d like taken out of the same paycheck that goes into your normal checking account and have it deposited automatically into your account solely for emergency funds.
In order to help you grow your emergency relief fund, you can make sure the account you choose is a high-yield account. A high yield account is basically an account that pays higher interest rates then an average bank account.
You can open a high-yield savings account at a bank or credit union. It allows you to also make direct deposits and is accessible to you by making transfers and withdrawals linked to your bank account. Your account is also protected in case of your bank failing for any reason.
There are several different kinds of high-yield accounts, but below you will find three high-yield savings accounts that have no fees and minimums.
0.50% APY. No fees or minimum deposit.
0.50% APY. No fees or minimum deposits.
Offers 1.00% APY (*to the first $5,000) with no fees if you receive direct deposits.
Hopefully this guide gives you an idea of where you should get started to create your emergency relief fund.
It may seem daunting at first, but small steps toward saving can lead to big results. And before you know it, you’ll have an emergency relief fund saved for any future financial emergencies - and you won’t have to stress about how they’re going to get paid for.