This Is The Most Important Financial Decision You Can Ever Makeporp

This Is The Most Important Financial Decision You Can Ever Make

How to create a ‘hedge’ against the worst financial disasters.

Setting up an emergency fund is one of the most important actions to take for your financial security.

Yet, statistics show that 57% of Americans don’t have enough savings to cover a $1000 unexpected expense.

Living without an emergency fund makes you financially vulnerable and leads to a lot of money-related stress.

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As personal finance expert Ramit Sethi said in his book I Will Teach You To Be Rich, “An emergency fund gives you the peace of mind knowing you have a hedge against the worst financial disasters.”

You Should Expect The Unexpected

Truth is, life can surprise us with financial setbacks at the worst moments:

Medical bills

Car repairs

Home repairs

Economy crashes

Job loss

High inflation

Theft

Divorce

Although it’s hard to predict which of these setbacks will hit us, we can at least prepare ourselves that — eventually — life will surprise us with one of them.

By having an emergency fund in place, you won’t have to go into debt, sell your investments, or suffer crippling financial stress when you encounter one of these setbacks.

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You’ve prepared yourself for it.

To build your financial emergency fund, follow the four steps below.

#Step 1: Decide On The Timeframe

Step number one is to decide how many months of living expenses your emergency fund should cover.

The recommended amount is three to six months’ worth of living expenses.

“An emergency fund is money saved for any unexpected expenses. The actual amount varies from person to person — but it should contain enough money for three to six months of living expenses.” — Ramit Sethi

Your level of risk tolerance is an important factor here.

For example, if you’re in your early twenties and don’t have many responsibilities, three months’ worth of living expenses could be enough.

But if you have a mortgage to pay and a family to provide for, you might want to choose six months’ worth of living expenses in your emergency fund.

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Again, life can throw unexpected surprises our way — and we need to be prepared for it.

#Step 2: Calculate The Necessary Amount

Once you’ve decided how many months of living expenses your emergency fund should cover, you need to calculate the actual amount.

First, calculate your monthly living expenses:

Utility bills (internet, water, electricity, etc.)

Rent/mortgage payments

Car payments

Insurance

Food/groceries

Etc.

Once you’ve calculated this number (a rough estimate would already work), multiply it by the number of months chosen. KO

Emergency Fund = Monthly Living Expenses x 3–6 Months

This is how much your emergency fund should be.

#Step 3: Start Saving

Now that you know exactly how much money should be in your emergency fund, it’s time to start saving.

Each month, put a fixed amount (or percentage) of your income aside and put it towards your emergency fund.

The more you can save, the better.

But even if it’s not as much as you like, it’s better to save something than nothing at all.

As Ramit Sethi said:

“57% of Americans have less than $1,000 in their savings account. That means if you save anything at all, you’re putting yourself in a better financial position than the vast majority of people.”

Make sure your emergency fund is clearly separated from your normal savings by opening a different (high-yield) bank account or creating a new subaccount for it.

You never want to mix your emergency fund with your normal savings.

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#Step 4: Don’t Touch It

Your emergency fund is meant for true emergencies only. It’s meant as financial protection for when you (and your family) need it the most.

It might be tempting to spend some of the money on a vacation, new car, or any other luxury — but don’t touch your emergency fund unless you absolutely need to.

When things go south in your health, your job, your home, or the economy, you’ll be grateful to have an emergency fund that has your back.

CONTRIBUTED BY Jari Roomer

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