Creating an emergency fund is difficult, especially if you’re already struggling to pay all your bills. You may believe that if you have access to a significant amount of open credit, you don’t really need to build up a savings or emergency fund. But if disaster should hit and you’re forced to put thousands of dollars on a credit card, you could find yourself struggling financially for years.
How to Create an Emergency Fund
Creating an emergency savings shouldn’t be overwhelming. Here are some tips and tricks to putting a little bit of cash aside so you can begin developing the emergency savings you need.
Why a Credit Card is NOT a Savings
A credit card can be great for emergency situations. If your car breaks down and you need a quick way to pay an unexpected few hundred dollars, having open credit on a credit card can really save the day.
But this situation is only reliable if you see a payment for that credit card bill in your near future. Whether you have the cash tucked away in the bank or you have the freedom to pull it out of a paycheck, the only time a credit card is a reliable option for an emergency is if you absolutely have a way to pay it off.
Don’t Use a Credit Card for Emergencies
The problem with people using a credit card as a way to get themselves out of an emergency is when they can’t afford to pay off their credit card bill. For particularly expensive emergencies, that bill could sit on the credit card for months, or even years, before it is paid away.
Another issue with only relying a credit card is that you’re likely to spend much more to cover the emergency on a credit card than you would if you have the ability to pay with cash. The interest on credit cards can be high, and as you continue to go months and months without paying your debt off, the interest will only continue to grow. If you can’t afford the emergency in the first place, you definitely can’t afford to pay more in interest than you expected.
Continuously avoiding credit card debt will negatively impact your credit. If your credit score gets too low, you will have a difficult time getting new credit cards, purchasing property like cars or houses, or taking out loans for things like education or a mortgage. Emergencies are usually unavoidable, but you don’t want one to ruin the rest of your life financially.
What is an Emergency Savings
An emergency savings is just how it sounds – a savings of funds to be used in the event of an emergency. These emergencies can range everywhere from losing your job, crashing your car, or an unexpected accident that leaves you with expensive medical bills.
It is impossible to be ready for any emergency that comes your way, but one of the best things you can do for yourself and your credit is create an emergency fund to bail you out of any unforgiving financial situations.
How to Grow an Emergency Savings
If you’re already living frugally, you may think you don’t have enough cash to set aside for an emergency fund. But the reality is that any little bit of money adds up and helps in some way. You may be unable to grow your emergency savings large enough to completely cover the cost of any emergency, but if you can reduce the cost put on credit, you’re helping yourself out in some way.
A general rule of thumb on how much money to keep in your emergency fund is around 6 months of living expenses. This includes rent or mortgage payments, car payments, groceries, and any other bill you would absolutely have to pay in those six months. This is your goal amount to always have within this fund, but at the moment it probably seems incredibly far away. Remember, you don’t need to reach this amount overnight, but the sooner you start saving, the better.
Begin saving by making a small goal, maybe one month of rent or mortgage payments. Set aside as much of your paycheck as you think you can do without, even if it is only a few dollars. You can also spend a bit of time each week earning some extra cash and automatically put that aside for savings. As you continue to set aside little bits, you will slowly but surely reach the goal you have made for yourself.
Emergency Savings Isn’t General Savings
It is also important for you not to view the money you set aside as a typical savings account. Only take money from this particular bank account in the event of a real emergency, which doesn’t include new clothes or a new car. Keep it limited to emergencies only and you’ll have some cash there when a true emergency hits.
For many people without much disposable income, an emergency fund seems like something completely out of reach. While it may take a bit of cutting back and restructuring your budget, you’ll be happy to have a fund of extra cash if you ever find yourself in a tight spot financially. Setting aside just a few dollars a week can get you on track to a decent emergency fund and keep you from making a bad emergency even worse!