Should You Have a One Year Emergency Fund?
Many financial experts recommend having a 3 to 6 emergency fund (of your typical living expenses) in the bank for unexpected events in your life such as a job loss. However, in today’s economy is a 3 to 6 months emergency fund enough? Many unemployed people are having difficulty finding jobs within 6 months. It’s now taking some people up to a year to find employment. So it maybe a good idea to have a 1 year emergency fund!
If you don’t have an emergency fund, the hardest part is how to get started. You know you should have an emergency fund but how can you create one when money is already being tight. As with most things, it’s all about creating a plan and sticking to the plan.
The first thing is tracking where all your money is spent each month. If you were to track every dollar spent you’d be amazed how much of that money falls in the “I don’t really need this” category. You also maybe surprised how much money you spend on small items that adds up to a decent amount of money over time. That $5 coffee you purchase every morning at Starbucks in a month is costing you $100. That’s over $1,000 in a year for coffee. That’s money you could have put towards you emergency fund.
Another strategy is to reduce your 401K contributions temporarily to build you emergency fund. However, if your company is matching you, you should put at least that amount in your 401K. So for example if you are putting 10% of your gross salary in your 401K but your employer matches dollar for dollar 6%, your should reduce your contribution to 6% to still getting the matching dollars. Why lose that money?
Also create a budget and look at each expense to determine what you can do to reduce that expense. Do you really need to be paying $85 per month for cable TV? Can you reduce it to $50 per month? Do you need to spend $100 per month for cell phone? Can you reduce it to $60 per month? Do you really need that gym membership that you almost never use, saving you $35 per month? Can you shop around for cheaper car insurance and raising your deductible saving you a few hundred dollars per year? Can you take your lunch to work instead of eating out everyday? If you look closely at your budget to determine how much money you can save by cutting expenses you will be surprised with how much money you can save!
So go ahead and get started. Time is of essence. Start today!
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