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How Big is Your Emergency Fund?

Running a household requires careful planning and preparation for a wide range of potential problems. An emergency fund (rainy day jar) is a way that individuals can demonstrate prudence in acknowledging that while no one can predict when something bad will happen, chances are high that something bad will happen at sometime in all of our lives. How big is your emergency fund?

It Could Never Happen Here

In the 1950s, Detroit, Michigan had the highest per capita income in the United States. California has a GDP ranking as the 8th largest in the world. Yet, in 2015, both Detroit and California are experiencing very difficult challenges.

No matter where you live, there are unforeseen events that can change your entire life if you are not prepared for them. Financial challenges can take a variety of forms - they may be inconveniences, accidents or natural disasters. Auto accidents, rare medical diseases, and job loss can place immediate burdens on your budget that cannot be handled by your regular income.

Savings allows you to control your destiny. Besides allowing you to handle negative events, savings gives you more freedom to enjoy positive aspects of your life. Savers have extra money for tipping workers or reducing onerous credit card bills. Here is credit education on 1. the Importance of Savings, 2. How much Experts Think you Should Save and 3. How to Save. 

1. Importance of Savings

Households with savings create better, more luxurious lifestyles. Family members can sleep better at night knowing that they have some savings tucked away for special events or emergencies.

Adept savers have different types of savings: petty, mid-term and long-term. Petty cash can consist of coins and paper bills to handle small emergencies. Mid- and long-term savings are more likely to be banking savings accounts earning interest. Compound interest can increase your savings dramatically over time.

Related Article: Is Going Cashless The Next Big Thing?

Running a Household: Food, Water & Money

Having some petty cash on hand is always wise. Families never know when someone may need emergency dry cleaning, money for a field trip, or some gas money. Making a petty cash jar readily available to responsible children could help them deal with emergencies and teach them valuable money management skills.

Part of being in a family is the higher threshold of shared responsibilities. If your uncle suddenly has an accident or your sister has a baby shower, you might need to have some spare petty cash on hand. Some people store “extra cards and gifts” to handle any emergency.

If you don't have small amounts of cash available, you might look needy, shallow or stingy. People will wonder if you need help because you can't spare a dime.

What is your Budget?

Starting with a budget is a necessity in order to determine how much income and expenses you have each month. Figure out what your surplus is. Economists refer to this as disposable income. This disposable income is the base from which your savings will be taken.

Homeowners should have an emergency repair fund for dealing with flat tires, plumbing problems or broken appliances. Those who have savings, can handle these problems without blinking. An emergency fund allows you to return to work and play by avoiding longer term disruptions to your life.

Savings not only helps you handle problems faster, but allow you to save money in the long run. Savings is like loaning money to yourself; you don't need to pay interest on your own savings.

2. Experts Suggest Saving Three to Six Months Expenses Worth

There have been many surveys asking Americans about budgeting and saving. While the results vary, an estimated 28% to 35% of Americans had no real savings. Many Americans are simply living paycheck-to-paycheck.

A primary target of savings can be protection against job loss. The Bureau of Labor Statistics (BLS) has reported that the average length for unemployment in 2015 was about 32 weeks (8 months). Families with savings can handle unemployment without disrupting their normal lives.

How would you pay your mortgage without your paycheck?

The "Chain Store Guide's Consumer Spending Report" found that 40% of US adults could only last one to three months if they lost their jobs. Experts suggest that people should save anywhere from three to six months expenses, which is the time it might take to find a new job. Of course, the more savings, the better.

Other financial experts advise that you save 5 to 15% of your income. This can be a challenge, but can give you more independence when you near retirement age.

Related Article: Are You Behind On Your Retirement Savings?

3. How to Save

Saving might seem difficult at first. But during the Great Depression, Americans survived on a lot less. You would be surprised by how many expenses are non-essential or frivolous.

Keeping a weekly tally of your expenses may help you see what are essential and what are non-essential purchases. Cigarettes, coffee, alcohol, movie tickets and restaurant visits are luxury items. You can survive without them.

Prioritize your Spending

Once you prioritize your spending, you can divert cash away from the frivolous to the essential emergency fund. Savers might go without a special coffee one morning and place the $5 saved in a rainy day jar.

When you get your paycheck, why not place some of it in your savings ? Many banks and credit unions have plans where you can automatically devote a percentage of your paycheck directly to your savings account. There are many ways to save.

As a member of society, there are always demands being made of you requiring small amounts of cash. Unforeseen emergencies will always arise. We cannot know when they will occur, but we can be prepared with emergency funds and savings. Those with an ample emergency fund sleep better at night.

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Alice Bryant's picture

Alice Bryant is the Editor of Creditnet and a personal finance expert with over a decade of experience writing about credit cards, credit scores, debt repair, and more.

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