Emergencies happen. They are the (unwanted) facts of life. An emergency can be a sudden illness, a broken refrigerator, getting a family member out of a jam or loss of job. We do not expect them to happen, but if we are prudent and responsible; we should definitely plan for them.
There are many individuals out there who do not know how to financially cope with an emergency. Also, there are people in this world who do not plan for it. Let’s face it; none of us want our hard earned money to go to a broken oven.
Unfortunately, we must plan for the future.
So, how do we fiscally prepare for an emergency? There are a variety of methods that can be utilized to manage a monetary fiasco.
In order to avoid becoming broke in the unfortunate event of an emergency, it is best to put money aside every paycheck. By doing this, you will avoid having to dip into your savings, investments or your overall spending money.
The rule of thumb for savings is 15 percent of your income. Although there is no general rule of thumb for emergencies, it’s best to put at least between three and five percent of your income aside for an emergency.
There are a couple of ways of doing this.
First, you can establish a secondary savings or investment account at your bank. This way, you will not only gain interest on your emergency money, you will also be able to track it and make sure that you do not touch it.
Secondly, you can simply have cash stored in your closet at home. Look at it this way. My grandmother used to have envelopes of cash. Each envelope was marked with what the money would be used for. For example, one envelope was marked “television bill” and $50 was put in it. Another envelope was marked “groceries” and $100 was put inside.
Following this, you can have an envelope marked “emergency” with $100 available.
Use Available Funds
If an emergency savings account does not suit you, your other available option is to find extra money available. If you already have a savings account or investments, then your available option would be to withdraw the money.
This may seem disheartening at first, but it is a much better choice than using a credit card or an establishment that loans out money with 20 percent interest.
Think about it, if your financial emergency is $100 and you try to get a loan for $100, you will be paying $120 plus the applicable fees.
If your monthly budget for groceries is $200, try to lower it to $175. Next, if you plan to spend spend the evening out and your budget is $50, try to spend only $35. Finally, if you plan to purchase gifts and have a budget of $100, attempt to buy only $65 worth of groceries.
By doing this, you will have $75 left over for your emergency without having to budget an emergency fund or take money out of your savings and investments.
Always try to cut back or eliminate non-essentials. You must prioritize your spending habits. What’s more important? Your ultimate cable package or going out to the movies every Saturday night? In this economy, you certainly cannot do both.