Few, if any, of us escape life’s financial challenges. Whether it’s layoffs, unexpected medical bills, or the loss of a spouse’s income, not having enough spare money to pay our bills for a month or two can lead many to impossibly strict budgeting, loss of real estate holdings, and sometimes bankruptcy.
As important as any other item in your budget, creating an emergency savings account with enough money to pay three to six months’ worth of your monthly bills can provide the financial buffer needed to survive while you get back on your financial feet.
So even as you pay off your existing debt, budget for regular deposits in your emergency savings account at least until you reach three months’ worth of expenses. Many financial planners suggest having six months’ worth of expenses in this savings account. To be sure, you should consider how long it might take you in your career and your own position to find and secure another job in case your current income stops. Finding positions in some professions takes longer than others.
In the beginning, consistency is much more important than quantity, so a $10 per month deposit is a good start. Many tend to spend any “extra” money they notice in their checking account, so take the savings amount as soon as you deposit your paycheck. To keep things simple, have your bank or credit union automatically transfer $10 or more from your checking account into your savings on a specific day each month. When the money comes out of your checking account, you’ll be less tempted to spend it.
Once you reach your target emergency savings account balance, take the monthly amount budgeted for that account and start applying it to any consumer debt you may have. Once you’re out of debt, that monthly amount should then go toward investments and retirement planning.
To be short:
1. Create and live by your monthly personal or household budget.
2. Open a new savings account – this will be your emergency savings account.
3. Once you get the paycheck, deposit the money into an emergency savings account at your bank, even if it’s only $10 a month. Increase as per your budget and income allows.
4. Determine how much you pay each month for expenses.
5. Continue depositing money into your emergency savings account until you have a balance equal to at least three months’ expenses.
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