Every American should have enough emergency savings to help tide them over when something unexpected happens. Sometimes, it is not irresponsible spending that will push you into a financial crisis. For some people, the lack of an emergency fund is the problem.
You see, even if you do not have the habit of borrowing money or using credit regularly, you are still in danger of a financial disaster. When something happens, like a trip to the emergency room or a busted transmission, where will you get the money to pay for it? You might end up borrowing money to pay for these if your income is only enough to pay for your usual expenses. Having no emergency savings and living from paycheck to paycheck can be a dangerous combination that can quickly put you into a debt spiral.
According to a survey, 3 out of 10 Americans had to pay for a major unexpected expense within the past 12 months. When we say major unexpected expense, these are the events that you cannot ignore. It may be health related or something that can affect your ability to earn money. If your ability to earn is compromised, you know that you are in trouble. This is why people would do anything to make sure the unexpected expense is met.
Unfortunately, only 39% had enough savings to cover a $1,000 emergency expense. Without enough savings, they ended up looking at other means to pay for the emergency. Most of the time, it involves borrowing money – like using their credit card, borrowing from family or friends, and even getting a personal loan. Some will try to reduce their spending but we all know how limited this can be.
Two emergency savings you need to have
Without a doubt, you need to make sure that you have enough emergency savings to get yourself out of a financial situation.
According to the Federal Reserve, your financial well-being is only secure if you can survive financial disruptions. It does not matter if you are earning a lot of money. Even if you have kept yourself from borrowing money, it does not matter. If you cannot survive a financial emergency, you cannot assume that your financial well-being is intact.
Fortunately for you, it is easy to survive a financial emergency. You only need to have sufficient emergency savings. Most people would immediately jump at the saving goal – establishing an amount that they will save up for (which is usually 6 months worth of their expenses). But before you do that, you need to know that there are two types of savings that you need to focus on. Some people think that they only need one fund. It seems like we should only have one fund but once you consider how emergency expenses happen, you will realize that it is not enough. When you have only one fund, you will not be able to reach the 6-month amount. There will always be something that will make you dip your hand into the emergency fund.
This is the reason why you need two types of emergency savings. These two separate savings will be used for different things.
Rainy day fund
This type is something that you will use for the unexpected expenses that you will encounter every now and then. If you have to change the transmission in your car, this is what you will use. If you need to go to the emergency room for a medical need, you will dip your hand into this fund. It is very important for you to replenish whatever amount you get from this fund.
When saving up for this, you need to calculate an amount that you can easily save up for. Some people will probably think that $1,000 is enough. Some might need more. Whatever the amount is, you have to work hard to reach it immediately so you can start using it in time for an emergency. After all, you never know when it will strike. And when you end up using it, you have to make sure to put back the amount that you got.
This is the second type of emergency savings that you need to have is the one you will use for long-term financial needs. This is bigger because you will use it in case your main source of income is compromised or you have a really huge expense to pay. For instance, if you are suddenly unable to work because you got sick, this is the fund that you will tap into. If you lost your job, this is the fund that will help you and your family survive. This is why you need to have a bigger amount in this fund. This is the one that you need to save up 6 months worth of expenses for. At the very least, it should be 3 months. But if you can save more, then you need to try to do that.
When you have these two emergency savings, you will be in a more secure financial position. Just remember to define what should be considered an emergency – especially for your emergency fund. The rainy day fund can be used for the more trivial unexpected expenses. But the latter fund is for more serious needs. If you can postpone using it, that is what you should do. You can even say that it should be used only for life and death situations.
While it may be possible to survive a crisis without an emergency fund, you can bet that it will be very hard to do so. This is why you need to make sure that you have enough emergency savings.
Rules that will help grow your emergency savings faster
The thing about saving up for a rainy day or emergency fund is the fact that it can be challenging to meet your target amount. There is always something that you need to spend on. Not only that, the emergency fund amount is usually a really big amount.
Based on the data from the Bureau of Labor Statistics, if the annual household spending is $57,311, you should save $28,656. At least, if you want to save at least 6 months worth of expenses. This amount is very big – and the fact that you may have to dip your hand into this fund every now and then will make it harder to meet the target goal.
To help you out, here are some rules that you may want to look into. Most of these will involve making changes so you can lower your household budget. Hopefully, this will make saving for an emergency fund easier to achieve.
- Always share resources. If you need to do something, always think of ways that you can share resources. For instance, if you want to meet up with friends, make sure everyone will bring something (like a potluck). You can also opt to share equipment like lawnmowers, etc. That will eliminate the need to buy one.
- Only buy energy-saving items. From the lights, equipment, appliances, windows, and doors – everything that is used in your house should be energy-efficient. This will lower your monthly energy bill.
- Learn to do things yourself. Instead of hiring someone to do stuff around the house, try to learn how to do it yourself. Learn how to cook your own meals. Do your own plumbing. Clean your own AC. These are things that you can save on if you learn how to do it yourself.