New Year’s Resolution: Start Your Emergency Fund

culled from:bankingsense.com

As each new year rolls around, it is common for individuals to reflect back on what they have accomplished for the last 12 months and to make plans to improve their lives in different ways going forward. Some of the common plans people have for the upcoming year may include losing weight, improving health or fixing the house up. In many cases, individuals have a strong desire to improve their financial situation as well — such as by creating a household budget and/or getting out of credit card debt.

But one of the best steps that you can take to improve your financial situation is to start your emergency fund, and this is a great New Year’s resolution to adopt today.

Why an Emergency Fund is So Important
When you think about the lofty financial goals that you may have for the future, such as buying a new home, building a huge portfolio of stocks or sending the kids to college without taking on debt, you may not think that socking away a few thousand dollars in an emergency fund is that important in the grand scheme of things. However, an emergency fund is a basic building block for financial success, and it can prevent you from taking on debt when you run into little emergency situations and unexpected expenses. For example, you may not have medical bills and auto repair bills every month, so you may not budget for these. However, you inevitably will need to pay for these expenses from time to time, and an emergency fund provides you with a source of cash, rather than debt, to do so.

How Much Money Do You Need to Save?
If you are like many people, you may not have an emergency fund at all. Perhaps you have a few dollars in your account, but it is not funded as fully as you really need it to be. There are different theories and recommendations regarding how much money you should keep in your account. A good rule of thumb is to think about the worst case scenario, such as if you lost your job or needed to pay for the deductible on your homeowner’s insurance policy. Do you have enough money to pay all of your bills for a few months while you look for a new job? If you did not have access to this cash in an emergency fund, where would you get it from? These are things to think about when you are wondering how much money you need to save in your emergency fund.

How to Start Your Emergency Fund
While figuring out how much money you need to have in your account can be challenging, it can be even more challenging to start your fund and to build your account balance. Keep in mind that you will generally not be able to fully fund your emergency account overnight, and it may take you several months or longer to build it to the level that you want. You may need to keep borrowing from the account as the need arises, and this can add to your difficulty. However, keep it mind that it only takes a few dollars to start a new account in some cases. If you are living on a tight budget, you may only need to cut back on your spending for a short period of time to come up with the initial funds necessary. Then, contribute as much or as little as you are comfortable with. Setting up an automatic draft from your checking account to your new savings account is a great way to ensure that your emergency fund slowly grows over time.

While you may need to dip into your fund from time to time, keep in mind that this is what the fund is for. It may seem like a setback when you see your account balance decline. However, it is far better to use these funds for emergencies than to build debt when you have an unexpected expense.