Even if you lived a charmed life, you'll eventually run into some unexpected large expense. Your car's transmission could need to be replaced (an average cost of $1,800 according to Edmunds.com), your refrigerator could give up the ghost (between $1,000 and $3,000), or you could need a root canal (between $750 and $1,000 per tooth). And while the economy is improving, companies are still announcing layoffs. How would you pay your mortgage or rent and other essential bills if you lost your job?
The best approach is to build an emergency fund. The recommended amount of savings varies, with most financial experts suggesting saving 3 to 6 months' salary. Another way to figure out how much you should save is to take a careful look at your budget and put away enough money to cover at least those expenses for up to 6 months.
How to Build Your Emergency Fund
Saving money may seem difficult, especially if your budget is tight, but it is possible. You don't need to put a lot of money into savings at one time, just make consistent deposits and your emergency fund will grow steadily. Here are some strategies to help you get started:
- Set up automatic deductions from your paycheck that are deposited into a savings account. Even if you only deduct $25 per weekly check, you'll have saved $1,000 in less than a year.
- Put at least half of your tax refund into your emergency savings. According to the IRS, in 2011, the average refund was $3,000. Adding $1,500 or more to your emergency savings is a quick way to build your financial cushion. Do the same with any bonus you get at work.
- Cut your expenses and put the money you save into your emergency fund each month. Find a lower cost cell phone plan and bank the difference. Take the money you spend every week on take out and put it into your savings account instead. Raise the deductible on your car insurance and put away the money you save.
- Keep the change. All the quarters and nickels weighing down your pocket can add up to hundreds of dollars over the course of a year, so collect them and put them into your savings. Another idea is to round up the cost of every purchase you make and put the difference into your savings. For example, if you spend $47.35, put the $2.65 into savings. Some banks offer programs that do this automatically when you use your debit card.
- When you pay off a debt, take the amount you were paying each month and deposit it into your savings.
- Even though it can be tough, do not raid your savings for non-emergency expenses like vacations or holiday gifts.