Financial Tips to Avoid Buying Misery: Part 3 Emergency Funds
We all know we need to put money away in case of emergency but how much is really the right amount? Many of you have student loan debt acruing interest at 6.7%. It’s important to have a solid 3 months of expenses in your savings account. You don’t want to be so aggressive about debt that you don’t have at least this minimum amount saved up.
I often read that an emergency fund should have 6 months of expenses. For most of you seeing your debt grow at 6.7% isn’t outweighed by an extra 3 months of expenses. Your savings account is there for emergencies only. You should have high expectations for yourself that if something happened to your job you would be able to find another way to replace your income within 3 months.
It’s hard to add to and build up your savings account when you want to tackle other expenses first. Just remember you don’t want a crippling financial setback from a surprise expense or job loss. Delay aggressively tackling debt until your emergency fund has 3 months of expenses. If you need to use some of your savings for an emergency replace what you used.
Here’s how I would replace money I had to use from my savings account. For this example say my 3 month emergency savings fund is $10,000. I have an unexpected car repair bill and need to spend $1,000. I don’t have $1,000 extra cash lying around or worked into my monthly budget. I’ll likely put the expense on my credit card initially (because I want 1.5% cash back on that $1,000) then pay off the balance by using $1,000 from savings.
Now my savings account has $9,000 in it. I need to work on putting extra income into my savings account each month until I reach the $10,000 mark again. For me that would mean making less of an extra student loan payment that month.
Notice I would use the money from savings rather than carry a balance on the card. Most credit cards have very high interest rates so I would waste money paying interest on the balance.
Beyond the emergency fund saving for big expenses is important too. If you’re considering buying a house or new car saving up is a great way to fund it. For most of you saving entirely for a new car or house is quite the challenge. However, expect to have a 20% down payment saved. The more you have saved the better you look to lenders and the lower interest rates you will get.
Larger down pyaments free up more of your income from debt payments in the future. I suggest finding room in your budget to continue to increase your savings account for things like this. If at first your debt load is very high maybe you can only save $50 a paycheck or per month. That’s OK, saving any amount on a regular basis helps build the habit. You may find it useful to save your money in different accounts for different types of expenses. Like separating your emergency fund from your house fund.
Saving for big ticket items like this requires a baseline of financial responsiblity and consistency. You should have consistently paid down your student loan debt for at least 3 months before funneling additional income to savings. Saving for a big purchase requires a solid knowledge of your personal cash flow so you don’t inadvertently put money where it doesn’t belong. If you have credit card debt don’t even think about saving for a bigger project. Your number one priority should be paying off your credit cards.
If you’re taking a big trip remember this is an optional expense so it’s important to save and budget appropriately so this doesn’t become a debt. Ideally you would have 100% of the planned cost of the trip saved up prior to heading out for your fantastic vacay!
Having an adequate emergency fund is one of the most important steps to becoming fiscally responsible. You should have 3 months of expenses in your emergency fund before you switch focus and start aggressively tackling debt by making extra payments. Before saving for big ticket items like a house, car, or expensive trip be sure you’ve established a routine of tracking your spending, budgeting, and paying down debt for at least 3 months. This ensures you have a strong enough knowledge of your personal cash flow to make informed decisions about saving.
What are your biggest challenges with saving money? What’s one trick you find has helped you save money for a rainy day? Let me know in the comments, send me an email jeni@millennialmaxims.com, or join our Facebook group and share your favorite goal(s)!
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