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Protect Yourself from the Unexpected with an Emergency Fund

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Protect Yourself from the Unexpected with an Emergency Fund

According to a study conducted by Bankrate.com, 29 percent of Americans have no emergency savings whatsoever. That’s essentially three in ten living paycheck to paycheck with no contingency plan. Another 34 percent have some savings, but not enough to cover three months’ worth of living expenses. What would these individuals do if their vehicle broke down? What if there was an emergency home repair? What if they lost their source of income?

Not having an emergency fund can turn from foolish to disastrous overnight. Think about it … nobody sets out with the intention of going into bankruptcy. Something bad happens and it spirals out of control. Bills go unpaid, fees get tacked on, interest accumulates and a bad situation gets worse and worse. With more than half of Americans unable to cover even three months of expenditure, an unexpected job loss can turn your life upside down overnight.

How Much is Enough?

Most experts suggest having at least three to six months’ worth of expenses in emergency savings. The first thing to do, then, is to add up your monthly recurring necessities — rent, debt, food, utilities, transportation, etc. Leave out the non-essentials or bills that could be quickly ditched in the event of a job loss. Depending on your contractual obligations, this may or may not include items like cable, Internet, gym memberships or other personal expenses.

Let’s say you’ve added your monthly expenditure and it’s right around $2,500. That means you should endeavor to have somewhere between $7,500 (three months’ expense) and $15,000 (six months’ expense) in savings.

The three months of savings number may be enough for some and not enough for others. When in doubt, err on the side of caution. Consider your financial position in terms of:

  • The economy: If the economy is in good shape, it probably won’t be much of a consideration. If we’re at a low-water mark as a nation, you may want to create more of a financial cushion.
        
  • Your skillset: Some jobs are easier to find than others. Sales and accounting jobs, for example, tend to be a dime a dozen. Not because they’re unimportant, in fact it’s quite the opposite. They’re such essential positions that many industries rely on their expertise. Photographers, philosophers and historians may find it a little more difficult to find gainful employment in the unfortunate circumstance of job loss. Know your skills and abilities and know your market. It might make sense to have a little extra in savings.
        
  • Fluctuating work: If you’re a freelance or contract worker, seasonal worker, self-employed or have fluctuating income for another reason, it pays to be extra careful. These workers are usually well versed in the ups and downs of income and the importance of saving in the event of a cash windfall.
        
  • High-risk industry: Major technological disruptions have turned the print media industry on its head. During the recession of 2008, the automotive industry experienced an overnight collapse. Now, in 2016, uncharacteristically low gas prices have the energy industry in a state of panic. Know your industry. If it’s in bad shape, bump up the savings.

The most important thing to remember is that finance is a marathon, not a sprint. The financially savvy adopt a long-term view of savings and understand that an emergency fund is not built overnight. It takes a series of slow but sure steps. Even a few extra dollars per paycheck into an emergency savings account will add up over a few years. Set your goal and remember that all the saving is meant to benefit and protect you in the end.

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