In my second edition of One Simple Step to Simplify Your Finances mini-series I discussed how consolidating can help you simplify.
Hope you have taken action and have begun to consolidate your accounts.
Now it’s time for the next simple tip to help you get your finances under control.
Are you financially prepared for your next unexpected expense?
How do you pay for those unexpected expenses?
- You have a urgent medial treatment not 100% covered by insurance
- Your car is damaged in accident
- Your furnace or air condition needs to be replaced
- Your company downsizes and you must find a new job
However if you prepare yourself you can minimize the stress and financial damage you incur if you establish an…
Why Do I Need an Emergency Fund?
No additional debt
Having an emergency fund enables you to avoid taking on additional debt to cover unexpected expenses. If you do not have an emergency fund in place, you are likely to turn to your credit cards or personal line of credit such as a home equity line of credit to pay your unexpected expense. It’s possible you may even delay paying one of your other bills to cover this expense.
By using debt to cover an expense it only increases the cost of the unexpected expense. Once you have used credit to pay the expense you have only delayed payment. You will still need to determine how you will pay off this additional new debt. This once unexpected debt can set you back financially for several months or years depending on the cost of the expense and your ability to pay it back.
Financial safety net
Having an emergency fund is similar to having a safety net in place to catch you when those unexpected expenses occur.
With an emergency fund you have money set a side to pay for those unexpected expenses. This allows you to simply pay for the expense without impacting your monthly budget which could create a financial hardship for you and your family. Having an emergency fund can act as a financial bridge if you’re unable to work unexpectedly for an extended period of time without pay or suddenly lose your job. Your emergency fund can cover your monthly expenses until you are back at work or have found new employment.
Having an emergency fund in place and adequately funded you do not have to stress yourself out worrying where you’re going to find the funds to pay for unexpected expenses or how your going to pay your monthly expenses if you lose your job or unable to work.
Where Do I Keep the Money?
Since you do not know when an unexpected expense will occur, these funds must remain very liquid and easily accessible. You should not put the money into any investment which could lose money. That kind of defeats the purpose of an emergency fund. You should hold the money in a saving account or money market account which you can access when needed.
How Much Do I Need?
The amount needed in your emergency fund is always up for debate. You probably have heard you should keep $1,000, 6 months of expenses, or 6 months of income. I believe it depends on your personal situation. Everyone’s financial situation is different so you need to build your emergency fund that works for you and provides you the financial peace of mind you need. Here are a few things to consider:
Your income stream is it consistent or does it fluctuate?
Your insurance deductibles?
Your current debt outstanding?
These questions can help guide you.
How Do I Fund It?
The best way to fund your emergency fund is to automate the process. This way you do not forget to do it. Once you set up the automated transfer you will continue to build it every month.
The above benefits are why it’s important to have an emergency fund in order to simplify your finances.
Now you must take action by funding your emergency fund. Start by establishing a monthly automatic deduction from your primary account to another account if you do not already have an emergency fund. If you do have an emergency fund make sure it is adequately funded.
Are you ready to begin simplifying now?
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Til next week take one step at a time.
Next week I will provide another simple tip for you to implement. So stay tune and sign up for newsletter so you don’t miss any of these tips.