Build A Life-Proof Emergency Fund

Build A Life-Proof Emergency Fund

The best financial defense is a good offense

Your car broke down. Your dog needs a minor-but-expensive surgery. Your laptop crashed. Your utilities are higher than you expected. Oh, and you’re currently between jobs. When it rains, it pours.

What can you do? Hopefully, you’ve come to this article before these things come crashing down on you. The best financial defense is a good offense. Read on to find out how you can prep yourself for bumps in the proverbial financial road by taking advantage of these easy saving money tips. Of course, if you aren’t prepared, there’s still a way out.

Save for at least three months of expenses.

Do you have at least three to six months of your basic living expenses in a special emergency fund? If a financial hardship strikes (think: if you lose your job), this will cover necessities like housing, transportation and food, as well as a reasonable margin for flexible spending.

Three months is the recommended minimum, but many people push this savings goal to six or even nine months of basic expenses. This way, you can cover the bills if another unexpected turn comes your way (your car breaks down while you’re out of work or if it takes longer than you had hoped to find a new job).

Another way to figure out how much emergency cash you’ll need: Fill out this emergency fund calculator, on State Farm’s learning center.

Find new ways to cut costs and earn extra money on the side.

There are two key things you can do to build your emergency fund: trim some fat off your monthly expenses and earn extra income on the side.

Let’s imagine that your goal is to save $600 per month. You can probably find ways to reduce your bills by $300 per month -- say, by cutting cable TV, dining out less frequently, and shopping around for more affordable insurance premiums . Then you can land a freelance graphic design job, or pick up a few shifts waiting tables, or babysit for the family down the block. These jobs can bring in another $300 per month after taxes.

There you go -- you’ve reached your savings goal. Your future self will thank you.

Make sure your emergency cash is off limits.

So you’ve got all this extra money that you’ve worked so hard to save up. Do you keep this emergency fund in your checking account? No! If you do, there’s a decent chance that the extra money could slip through your fingers.

To protect your emergency cash, stash it in a special savings account that’s earmarked specifically for this purpose. You’ll want your emergency fund to sit within a special account or sub-account that’s designated only for emergencies.

You’ll also need a clear definition of what’s an emergency and what’s not. If an expense is genuinely unexpected, like a leaking roof or a failed car engine, then the event may qualify as an emergency. But if you could reasonably expect an expense, you should plan for it in advance. If you know that your utility bills rise every winter because your heater is always on, start saving for this in the spring or summer. The more you can save in advance for annual or quarterly expenses, the less likely the need to raid your emergency fund to cover it.

Take extreme measures if the fiscal emergency is happening now.

If you’re currently in the middle of dealing with a personal financial crisis, and you don’t have the cash reserves to pull yourself through, there are a few things you can do. First, - breathe. You’re going to be fine - just weather the storm with patience and good decisions.

Next, cut out all non-essential costs. All discretionary spending -- restaurant dining, coffee runs, shoe shopping -- needs to stop. Cut recurring bills that aren’t critical, such as cable TV and magazine subscriptions. Lastly, look around your home to see if you can sell any items for extra cash, and look for fast ways to earn more money by picking up side income gigs. Whatever you do, don’t panic. Try not to take on additional debt by using credit cards (and make sure to at least pay your credit card minimums, if you have them, so that you don’t adversely affect your credit rating).

Finally, once you pull through the crisis, start rebuilding your emergency fund. This will keep you from needing to take drastic measures in the future.

At State Farm, we want to empower you in every stage of your life. We’ve teamed up with The Balance to provide financial content for the most important milestones in your life. You can find this article and more at the State Farm Learning Center, which offers information, tips and advice on everything from becoming a new parent to planning for life after retirement.