Few, if any, of us escape life’s financial challenges. Whether it’s layoffs at work, unexpected medical bills, or the loss of a spouse’s income, having insufficient reserve funds to pay even a month or two of our bills can lead many to impossibly tight budgets, loss real estate and sometimes even bankrupt.
As important as any other item in your budget, creating an Emergency Savings Account with sufficient funds to pay three to six months of your monthly bills can provide the financial cushion you need to survive while you recover your finances.
So even while you’re paying off your current debts, budget for regular deposits in your Emergency Savings Account at least until you reach the three-month spending level. Many financial planners even suggest keeping your six-month expenses in such a savings account. You certainly need to consider how long it will take in your particular career and position to find and secure another job should your current income cease. Positions in some professions take longer to find than others.
In the beginning, consistency is much more important than quantity, so even a deposit of $ 10 each month is a good start. Many tend to spend the “excess” money they notice in their checking account, so take out the savings amount as soon as you deposit your paycheck. To keep things simple, have your bank or credit union automatically transfer $ 10 or more from your checking account to your savings on a specific day each month. When the money is out of your checking account, you will be less tempted to spend it.
Once you’ve reached your emergency savings account target balance, take the monthly budgeted amount for this account and start applying it for any consumer debt you may have. Once you are debt free, that monthly amount should go toward investing and retirement planning.
To sum up:
1. Create and live according to a monthly personal or family budget.
2. Open a new savings account: it will be for your emergency savings account.
3. As soon as you receive a paycheck, deposit the money from the Emergency Savings Account with your bank, even if it is only $ 10 per month. Increase as your budget and income allow.
4. Determine how much you pay each month for expenses.
5. Keep putting money into your Emergency Savings Account until you have a balance equal to at least three months of expenses.