An Emergency Fund Is Much More Than Just Having Extra Money in the Bank – Why It's the Most Important Step in Reducing Financial Stress
Another study showed that the average American household credit card debt is at its highest level since 2008.
What This Means to You?
If you're in one of these groups, then having almost any unexpected expense is going to throw your life into turmoil. Something that should be just a mere inconvenience is now going to become a crisis!
This is why having even a small emergency fund, say less than $500, will be able to provide you with peace of mind because you will be able to prevent these situations from becoming emergency situations.
Not only does it prevent a situation but from becoming a crisis, it also takes away the all-present stress of knowing that such an event could happen at any time.
You know what I'm talking about. You've been there before, we all have!
And yes, you always seem to survive and you will in the future. But no one likes asking a family member to borrow money.
No one likes it when you're bank balance always stays on the brink of being over drafted.
How suddenly the lunch you just bought caused a snowball of overdraft fees because you forgot to account for an expense somewhere.
$500 In a Savings Account Should Be Your Number One Priority Initially
I believe your number one goal which will give you the most immediate results in your financial well-being is to get at least $500 put away in your savings account.
Before you do anything else, this is the one step that will provide you with the most sense of relief.
Even though it's not a lot, for the majority of people it is enough to reduce your ongoing stress levels the most.
It will allow you to avert most of the unexpected expense situations without being a huge burden.
And most importantly it allows you to keep from having those situations turn into stressful crises.
Granted, I'm not saying that $500 in savings in an emergency fund is going to cover all unexpected expenses.
But it will cover most of the unexpected expenses that occur most frequently.
And since these types of unexpected expenses occur with the most frequency, then taking them off the table logically reduces the most common financial stresses.
Financial Stress Affects More Than Just Your Financial Situation
You know as well as I do that financial stress and financial crises affect more than just your financial life.
It affects your household, it affects your children, it affects your relationship with your spouse, your work, and impacts every aspect of your life.
The first thing you should do is take action to knock off the table that item which occurs with more regularity than others in your financial life.
You can then work on all the other things with more optimism such as paying down debt, reducing expenses, and adding to your savings.
But you have to start with the thing that impacts you the most, that unexpected expense.
Questions About An Emergency Fund
How Big Should It Be?
This depends on your financial situation but if you have no fund at all then get at least $500 in there as urgently as you can so you can cover the unexpected expenses that are most likely to occur regularly.
After you get this in place then you can start building it up to cover those situations that can occur less often, but may require a significantly more amount of money.
After you get the $500 in your emergency fund then the next step should be to get it to $1000.
After that your priorities may change a little where you begin to work on a few things at once such as slowly growing the amount of the emergency fund while you try and pay down some debt.
Where Should You Keep Your Emergency Fund Money?
Because it of its very nature, it needs to be somewhere that you can get at readily, but we suggest it not being in your checking account.
You don't want to be tempted to use it when you look at your checking account balance.
The best place to keep it initially is in a separate savings account where you can transfer the money to your checking account or withdraw it without having to wait much time.
When Do You Use It?
Don't treat it like extra money that you just have laying around. Treat it like its name implies. It is an emergency fund!
If you're tempted to use it and it's not obvious, then ask yourself, “is this truly an unexpected expense?”, “is this expense absolutely necessary?”, and “is this an urgent situation?”
Yes, should be the answer to all these questions. So you can feel justified in using it.
If you do have to use it, then you also have to replace it. And no matter what situation you're in, replacing it needs to again take the top priority.
The Benefits of Security
By far the biggest benefit of having an emergency fund is the sense of peace of mind and security that you get when you have it.
I can't overestimate what this can do to lowering your stress levels. Start small, get that $500 in a savings account, and most importantly get started on it.
This is the easiest, quickest, and singular action that will have the biggest impact on your financial life.
Its impact is immediate and profound in changing the way you manage financial situations.
It allows you to be able to put yourself back in control and keep unexpected expense events in their proper place, as just events not crises.
Let us know your thoughts or input!