You probably already know what an emergency fund is (a lump sum of at least three months' worth of living expenses, preferably six to 12), and why you should have one (to cover unexpected expenses). But according to Ohio University research referenced by personal finance columnist Liz Pulliam Weston, only three in 10 households have an emergency fund that could cover them for even three months. Almost a third of households have no savings at all, according to an AC Nielsen poll.
If you have zero or insufficient savings, what's holding you back? Read the following answers to two of the most common questions and excuses for not starting an emergency fund:
Can't a credit card cover my emergency expenses?
Most financial experts agree that the first step to getting your finances in order is to start with savings of at least a few hundred dollars for unexpected expenses, even if you are paying off debt. Dave Ramsey, author ofThe Total Money Makeover, advises people to save a $1,000 emergency fund before paying down debt. After the debt is repaid, Ramsey says to return to building your emergency fund to cover the standard recommendation of three to six months of living expenses.
The reason the emergency fund is important is that you will immediately begin to break the cycle of debt. Should an unexpected and urgent expense occur, you've got cash to handle it so that you aren't adding new debt to old debt.
Also, if you are trying to establish good money habits, paying for emergencies plus interest isn't the way to go. For example, if you charge $1,000 to a credit card with a 12% interest rate and can only pay $50 toward the balance each month, it would take 23 months to pay it off, plus $122 in interest. Should a second emergency occur in that time period (and it likely will), you're further in the hole.
How can I start an emergency savings account when I live paycheck to paycheck?
If you don't have a single red cent left over at the end of each month, you might think there's no way you could start an emergency fund savings account. In truth, you are the exact kind of person who needs one the most! If you live paycheck to paycheck, where will you get the cash should an emergency occur?
Three to six months' living expenses is a great goal, but it's not all or nothing. Any amount helps. Start by tracking your spending to see where you can cut back, and put that savings toward your emergency fund. Budget already stretched to the max? Try some of the following emergency fund-boosting suggestions:
- Instead of buying a new flat screen TV, use your tax refund to kick-start your emergency fund.
- Ask for a raise if you feel you've earned one, or look for opportunities for a promotion.
- Get a part-time job. It might not be fun, but it could only be temporary.
- Sell your junk. Have a garage sale or sell it online on sites like eBay and Craigslist.
- Stash spare change. A few dollars here and there will add up to hundreds.
- Do you have a potentially income-generating hobby? If you build or make something, could you sell it on a website like Etsy?
Finally, if you receive unexpected gift money, bonus, or a raise, immediately stash it in your emergency fund. The best "gift" or "bonus" you can give yourself is peace of mind.