Putting Your Plan into Action
Buying a less expensive car, the next time you are shopping for a vehicle, and canceling your cell phone service are two easy ways to come up with some cash to fund your savings plan. Skipping that two-week vacation, cutting down on the amount you spend dining out, and saving your next raise or bonus are also simple methods of adding to your emergency fund.
Ideally, you should treat your emergency fund like any other recurring bill that you must pay each month. Dedicate the appropriate amount from your paycheck and set it aside. While most people have no qualms about regularly sending enormous amounts of money to credit card companies, they balk at the idea of paying themselves first. Change that equation; cut up your credit cards and put those payments into your emergency fund.
If you are among the many investors who don't have a "rainy day" fund stashed away in case of emergencies, there's no time like the present to start saving. Even if you don't have the dedication to address the project with a dedicated savings program, you can start simple: Take the change out of your pockets at the end of the day and put it in a jar. You could also eat at home instead of dining out and "tip" yourself by adding a few bucks to your emergency fund. If you get "cash back" on your credit cards, or just paid off a big debt, such as a personal loan or an automobile, put that newfound money into your fund. If you get a tax refund, deposit the check into your fund. If you manage to dedicate just $5 per day to your effort (less than the cost of lunch!), you'll have $1,825 at the end of the year; that's $9,125 in just five years. (For more money-saving ideas, read Top 5 Easy Saving Tips.)
The Bottom Line
View your emergency fund like an insurance policy. Once you have it, guard it carefully. It's not a piggy bank; you should not be dipping into it for incidental expenses. In fact, as your salary rises, be sure to up the amount to match your new situation.
Use the fund only in the event of an emergency and hope that emergency never happens. Remember, once that money is spent it always much longer than anticipated to replace it. Start now and save whatever you can, even if it isn't much. Some day, when you need the money, you'll be glad you did.
While you may imagine that you've secured all roads, it's generally a smart thought to have a full speculation and protection arrangement done at any rate once at regular intervals.
As you get more established, life tosses new curveballs at you, for example, making sense of whether you require long haul care protection and shielding your domain from a huge assessment bill or extensive court forms. Tips like having a crisis restorative contact card in your satchel or wallet are seemingly insignificant details numerous individuals never think about that a specialist can help you learn.
While your household expenses may be higher or lower than the average, there's no doubt that even three months' worth of expenses is a big number. One look at that number and the average person's first reaction is, "I can't come up with that kind of money."
Why So Much?
The amount of money required to fund a proper emergency fund is certainly significant, but we live in uncertain times with uncertain economies. Corporate loyalty is a thing of the past and unemployment can happen unexpectedly, usually at the worst possible moment. Likewise, emergencies like sudden illness or disability, car repairs or a new roof, can be expensive and there's never a "good" time for these things to happen.
While it's probably true that you don't have an extra $13,373 lying around, everything is relative. Even six months' worth of expenses is a puny number compared to the amount you will need to save for retirement; there's not a savvy investor out there, who balks at the idea of stashing away so much money that he or she will never need to work again. When compared to what you'll need over the course of 20 or 30 years in retirement, three months' worth of expenses doesn't look like much. (For more on retirement savings see How To Maximize Your Retirement Income.)
Crunching the Numbers
Now that you have things in perspective, it's time to start saving. Approach this effort the same way you would approach any other financial goal. Put together a plan and execute it. The first step, is to determine how much you spend each month. Housing, transportation, food and healthcare will likely be the three categories that eat up most of your cash. The average U.S. consumer spends 57% of his or her income on these items (based on 2014's average annual income before taxes of $66,877). Once you know your total expenses for each month, multiply that number by three. Reaching that number will be your initial goal. To achieve your three-month target, you need to start saving money. (To find out where your money is going, see The Hidden Costs of Home Ownership.)
If we assume your initial goal is $10,000, the table below illustrates how much you will need to save each month, over a five-year or a 2.5-year period.
For the best insurance records, consider keeping a detailed list of the contents of your home and update it yearly. The list should include serial numbers, photos and descriptions of everything, even the fixtures. This will expedite the processing of any claim you may file and serve as documentation for your tax losses and deductions.
The best way to make sure your list is accurate is to ask your insurance agent what he or she wants to see in a claim. For more expensive items like jewelry and costly electronics, you should consider separate coverage over and above the basic coverage of the items in your house (items that are likely depreciated yearly by your insurance policy). If you have a home office, you can get affordable business coverage to cover the equipment that you use for the business, rather than putting it under your basic home policy. (To find out which deductions can help your home office, read Don't Overlook These Broker Deductions.)
Renting? You Still Need Coverage
The insurance that your landlord carries will cover damages to the building, but not your possessions. Therefore, if you live in an area that's prone to natural disaster, you should consider renters insurance. Not all policies are created equal; if you get a bare-bones policy that just covers the replacement cost of your stuff, you will be missing possible coverage for the relocation to another area or the living costs while you wait for your apartment to be repaired. Renter's insurance can be pretty cheap, so shop around for the best policy and the best price. Reading 6 Good Reasons to Get Renter's Insurance can help you get started.
Emergency Documents
With the exception of your will, which should be kept by your attorney or at the local registrar's office, you should rent a safety deposit box for the originals of all other important documents. Keeping them in your home puts you at risk of having them stolen, destroyed in a fire, swallowed in an earthquake and so on. This includes everything from your home's deed to your marriage license.
One good idea would be to make two extra copies of all of these documents and leave one set with your attorney or a trusted friend/relative. The second set will be placed in your emergency kit. (For more, see Three Documents You Shouldn't Do Without, Protecting Your Financial Documents from Disaster and Building an Emergency Fund.)
Emergency Kit and Your Wish List
An emergency kit is a small and compact package of things that you want to bring with you in the event that you and your family need to flee from a disaster. Your emergency kit should be a box small enough to run with. Making a pack that is waterproof with a lock would be a plus, but a child's plastic lunch box will do in a pinch.
Full Replacement Coverage
At the very least, you should have full replacement or replacement cost coverage. This policy will cover the cost of replacing your home or other insured buildings. Pay attention to the limits of the policy because they will define what kind of further coverage you need. Earthquake and flood insurance are sold as separate policies and, although the premiums can be high, you should buy them if you live in an area that regularly suffers such disasters.
If you are new to the area, the local library archives will have environmental data that will help you look into what kinds of natural disasters have occurred in the area in the past. (Keep reading about this in Insurance Tips for Homeowners and 15 Insurance Policies You Don't Need.)
Keeping Current
Once you have your home covered with all the relevant policies, you will need to have your home reassessed every few years so that the policies reflect the true value of your house. Also, if you do major renovations, such as installing hardwood flooring or finishing the basement, you will need to update the policy. There is a more extensive home insurance policy available called a guaranteed replacement cost policy. This policy will rebuild your home, and may include improvements dictated by changes in the building code (something other policies may omit), but it is not available everywhere.
Covering Your Possessions
For the best insurance records, consider keeping a detailed list of the contents of your home and update it yearly. The list should include serial numbers, photos and descriptions of everything, even the fixtures. This will expedite the processing of any claim you may file and serve as documentation for your tax losses and deductions.
The best way to make sure your list is accurate is to ask your insurance agent what he or she wants to see in a claim. For more expensive items like jewelry and costly electronics, you should consider separate coverage over and above the basic coverage of the items in your house (items that are likely depreciated yearly by your insurance policy). If you have a home office, you can get affordable business coverage to cover the equipment that you use for the business, rather than putting it under your basic home policy.
