How to Handle Emergency Expenses Without Going Broke
Life has its way of throwing curve balls—which often come in the form of unexpected bills or expenses. No matter what your financial situation, dealing with the unexpected can be a challenge. Just what can you do when you’re hit with a bill for hundreds or thousands of dollars for a car repair or emergency room visit that you never budgeted for?
But an emergency doesn’t have to be a financial disaster. Let’s talk about how to make your next unexpected expense easy to manage by building an emergency fund today.
Why Do You Need an Emergency Fund?
Your savings is your financial safety net and there’s no time that’s more obvious than when you have to foot an unexpected bill. If you have not built a decent cushion of savings, that expense is coming out of your budget and takes away your ability to make other, just-as-important purchases.
This is why it’s important to have savings just for emergencies—that way, when emergency strikes; you don’t have to worry about money or what bills you are not going to be able to pay.
Your Credit Card Isn’t an Emergency Fund
Your first thought when dealing with an unexpected expense may be to reach for your credit card. However, if you do not have the funds to pay the bill when it comes due, this could land you in more financial hot water. High interest rates on credit cards mean that your debt can grow into something unmanageable. While a credit card can be a useful last resort in an emergency, it is better to have other resources to draw on so you don’t drive yourself into debt.
If you do have to rely on a credit card for emergency spending, be sure to make a plan to pay that debt down as soon as possible.
How Much Should Be in Your Emergency Fund?
An ideal emergency fund is three to six months of living expenses. Yes, that’s a lot of money, but it gives you a nice financial cushion that can help you through anything that life throws your way. If have a big unexpected car repair, you’re covered. If you’re laid off, you don’t have to rush to take the first job you can find. Having a good-size emergency not only gives you some financial stability, it also makes emergency situations less stressful—because no matter what happens, you’ll be able to foot the bill.
If these numbers are just too much, then start smaller. Aim to build an emergency fund that’s $500 or $1000 dollars. Though that won’t get you far if you’re laid off, it will help you through unexpected expenses. Just remember not to stop once you’ve hit that initial goal. You should keep building to hit at least three months’ living expenses in the long term.
How to Build Your Emergency Fund
The best way to build savings is slowly: if you divert a small amount of your paycheck into your emergency fund every month, it won’t take a big bite out of your spending money but it will add up over to substantial savings over time. Start by taking a careful look at your budget to see what you can afford to tuck away in an emergency savings account. A savings account separate from your checking account is best, and if you can find one that bears interest without placing many restrictions on how you can access your money, that’s ideal to help you build your savings a little faster.
If you can’t find room in your budget for savings, try to make some room. Are there unnecessary expenses in your budget? Are you able to cut down on you debt—and thus big monthly bills? Do you really need a pricey cell phone or cable plan? Even small changes—say, skipping buying coffee in the mornings—can add up to real savings when you add it up over the course of a month.
It’s a good idea to set aside as much as you can reasonably afford, and once you feel you have a good emergency fund you can start setting aside savings for another goal—whether that’s the down payment for a house, a car, or a vacation you’d like to take.
Whatever you do, don’t tap into your emergency fund for non-emergency purchases. While it may be tempting to use your savings for the latest high-tech gadget or updating your wardrobe, if you spend your emergency savings, you won’t have it in case of an actual emergency.