Saving, Investing, and Personal Finance – Emergency Fund
Do unexpected events usually put you in debt? You save yourself a lot of aggravation, and you can make your own life a lot easier, but it will take time and patience. It all starts with understanding your fate is up to you. This is the one of a series of articles for those new to saving, investing, and personal finance.
Someone once said, "Getting out of your comfort zone is like an airliner changing altitude, you're cruising along, your drinks sit where you left them. The plane raises its altitude, you have stop whatever you're doing to stabilize your drink and the stuff on the tray, because if you don't, you'll end up wearing it. It's uncomfortable, perhaps there is even some turbulence. But then, the airplane levels off, the tray is flat again, and you can go back to whatever you're doing. The point is that change is often uncomfortable but you have to get through it to get to the next level."
No one can fully prepare for major emergencies, a major illness, the death of a family member, or something of that nature. Dealing with issues of that magnitude is beyond the scope of this article.
Fortunately, many of the things we call emergencies are considerably smaller. The car breaks down making it hard to get to work. The a/c goes out in the heat of summer. A major appliance needs repair.
For someone who is unprepared, it is an emergency. For those who have to borrow the money, interest payments add to the expense. Each added item escalates financial stress. A sense of urgency, or being out of control, can elevate stress.
But, if you're prepared, many emergencies become relegated to being mere inconveniences; they can become less stressful, and can cost less too.
No one can predict with certainty what will happen, but we all know unexpected things do happen. Why wait and be caught short? Why not prepare an emergency fund in advance? It is much less stressful to have money saved to pay for things before they occur, than it is to allow things to happen, and pay for the event with debt. The interest saved reduces your cost, and that itself becomes another less worry.
Most financial planners will tell you if you want to solve your financial issues long-term, you need a firm foundation, and that an emergency fund is one part of building that foundation.
Don't be shocked but a good rule of thumb for an emergency fund is to have $1000 in an emergency fund. The number depends on your situation. Use your records to look at all the emergency events over the past few years and average them. Now you know on average, how much you have spent on emergencies annually. After excluding one-time events, unless something changes, is there any reason to assume this average expense won't be the same this year? Don't be surprised if it comes up close to this number.
At first this idea may be outside your comfort zone. You may not be able to save as much as you should save right now. Saving is a learned skill, like any learned skill, it may help to start small and work up to learn how to save more. A small emergency fund is better than none at all. Or, saving may be out of reach entirely until you can pay something down, or gain additional income.
An emergency fund will save you interest payments, and knowing you have money in the bank to cover many of life's emergencies can reduce stress, which is itself quite liberating.
An emergency fund is one of many steps in getting to a better point in financial life. It all starts with understanding your fate is up to you.
Individual Initiative is not an investment service. The information provided is intended to assist you by providing one of many sets of ideas about savings, investing, and personal finance. You should consult many resources to gather many ideas, then use only the ones that you believe will work best for your specific situation. This website contains a comment area. Comments made are those of the contributor and may not reflect the views of Individual Initiative. All investments include risk, including loss of principal. You should be certain you understand both the risks and benefits of any investment or investment strategy before investing.