Life has a tendency to hit us with a lot of “unexpected expenses,” whether it’s a new part for your car, or a hefty doctor bill. According to a recent study, only 38% of Americans said they could cover an unexpected emergency visit, or even a car repair with cash on hand in a checking or savings account. Yikes. That’s not a very good statistic.
The key to keeping a solid budget is ensuring you’re not spending more than you’re taking in. Sounds simple, right? However, living within your means is easier said than done. If you let your discretionary spending habits run amuck with little to no control, you might find yourself dipping into that savings account or emergency fund to cover the blow. Before you know it, your entire emergency fund is drained and when that unexpected expense pops up, you’re unfortunately left with nothing to cover the bill.
Most students ignore the advice of saving for an emergency fund, either because they have their parent’s financial support to fall back on, or they don’t see the incentive of saving money. Consider looking at your emergency fund the same way you look at health insurance, or car insurance. You may not use it every day, but boy does it help you sleep at night, knowing that you’re covered in case of an accident.
In college, you’re typically just making enough money to get by, but we urge students to get in the habit of saving now, no matter the amount. If you can afford to put away as little as $40 a month into an emergency fund or savings account, imagine how much money you’ll have saved at the end of your college career! ($40/month for 4 years = $1,920!) This money can be used for a last minute plane ticket for that job interview, a security deposit at the new apartment, and obviously for any unexpected expense that arises along the way!
After college, emergency savings become even more crucial. Maybe you landed your first job after graduation and things are going great, until you find out the company is closing your department and you’ll be losing your job. Sounds scary to me! You know what’s even scarier? Not having enough back up income to live off of because you didn’t save enough in your emergency fund. A general rule of thumb is to have at least 3 – 6 months’ worth of your normal expenses (rent, utilities, payments, food, etc.) saved up in the event you are between jobs, or need those extra funds.
At first glance, this may sound like a lot of money up front, but gives you time to prepare and work towards this goal. Another popular guideline includes dedicating 20% of your income to savings, like 401(k)/retirement contributions, your emergency fund, and extra savings. Remember to always pay yourself first! You are going to be glad you did it in the long run.
Bottom-line: If you haven’t started saving for your emergency fund, start today! Your future self will thank you 🙂
As always, our trusted advisers are available to help you build savings options into your budget. Give us a call to schedule an appointment today! 515-294-2223
Source : Claes Bell, CFA. http://www.bankrate.com/finance/smart-spending/money-pulse-0115.aspx