Even the best of plans can be threatened by an unplanned event, an emergency, or even our own stupidity. Working with a financial planner can limit the amount of risk we are exposed to, but no matter how you cut it, sometimes life throws you a curveball.
In order to absorb the unpredictable, most experts agree that having an emergency is one of the key pillars of financial health. This reliable safety net allows you to pay for unplanned expenses without having to resort to credit cards and loans.
Here are three things to know about emergency funds:
- How Much to Save – Experts recommend setting aside funds to cover three to six months of expenses. It may be difficult to save this right away, but start with what you can afford. In time, work up to setting aside 5% of your paycheck to go into this account. You will be surprised at how quickly you reach your goal once your saving becomes automatic.
- Where to Keep Your Money – In order to avoid the temptation to dip into your emergency fund to cover everyday expenses, keep your funds in a separate savings or money market account. The funds need to be separate from everyday spending, but still accessible in the event of a financial emergency.
- What to Use it For – Only use your emergency fund for true financial emergencies, such as unexpected health expenses, critical home or auto expenses, or essential expenses in the event of a job loss.
If you do have an emergency, be sure to replenish the funds that you use so you can be prepared again in the future if the need arises. Life happens, but being prepared can lessen the impact, turn a catastrophe into a headache, and get you back on your feet sooner rather than later.