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emergency fund

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Save your money: this piece of financial advice is universal. It doesn’t matter who you ask, everyone knows that having an emergency fund is essential. What’s less obvious is how you build it or where to put it all. That’s where asking the right questions can come in handy. Below, you’ll find the answers to five important questions about your emergency fund.

1. How Much Should I Save?

A prevailing rule of thumb for emergency savings is to squirrel away enough to cover three to six months of living expenses.

But how much you need to feel safe in an emergency is subjective. It depends on a lot of factors, like your risk tolerance, support system, and the emergency itself.

2. What if an Emergency Arrives Before I’ve Saved Enough?

Emergencies don’t follow a strict schedule like your rent payments or utilities. They arrive sporadically throughout the year, usually when you’re least prepared to handle them.

If you don’t have adequate savings for an unexpected emergency repair or medical expense, you might need to borrow money. There are personal loans like an online installment loan or line of credit that can be your safety net when your savings fall short.  

3. Should I Save or Pay off Debt?

It can be challenging to juggle both of these goals simultaneously. If you’re on a tight budget, you might have to choose one or the other.

In that case, it’s essential you make any minimum payment on installment loans and line of credit personal loans. This will protect you from late fines, extra interest charges, and potential damage to your credit.

If you have any leftover cash, put it toward a small emergency fund, aiming for something like $1,000 rather than the usual six months of expenses. Savings win over debt here because it’ll help you avoid adding to your debt.

Once you feel secure, start using your expendable cash on debt payments. Choose between the avalanche and snowball methods to find out which debt you should target first.

Stack of coins with emergency text. Premium Photo
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4. What Can I Use it On?

Use your emergency fund on unpredictable, essential expenses that you didn’t think to include in your budget. Think medical expenses not covered by insurance or auto or household repairs that you can’t ignore.

If you still aren’t sure, it’s helpful treating your fund like it’s an installment loan.

  1. Necessity: Due to their cost, you would only ever take out an installment loan online if you couldn’t wait to pay a bill or repair. Installment loans are designed to help with unavoidable, unexpected emergencies that you can’t delay. So is your emergency fund.
  2. Repayment: An essential part of the borrowing process is paying back your installment loan. The same goes for your emergency fund. You should pay back whatever you take so that you’re prepared for the next unexpected expense.

5. Am I Making the Most out of My Savings?

Consider where you keep your emergency fund. A stack of cash under the mattress isn’t just old-fashioned. It’s also not using your money to its full potential because you won’t earn interest on this cash.

Interest is a two-way street. It’s something you pay whenever you borrow money, but it’s something you earn when you save it.

Shop around for savings accounts with a high interest rate without penalizing you for taking out your money out of the blue.

Did this answer your most burning questions about saving? If not, keep asking until you build out savings that can handle any emergency.

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Financial emergencies can hit anybody at any time. Even if you know how to save money effectively and have built up an emergency fund to assist you during a financial crisis, there will be times in your life where you need a lot of money quickly to maintain your quality of life.

There are many different types of financial emergencies that can drain your emergency fund and force you to look outward for additional money. With that said, some financial emergencies are more common than others.

Common Financial Emergencies:

  • Medical bills
  • Funeral expenses
  • Car trouble
  • Cost of living increases
  • Household repairs
  • Job loss

Various Ways to Cover an Unexpected Financial Emergency

When a financial emergency hits, like the ones listed above, it can create a heavy mark on your life. You will need quick financial relief to handle this unforeseen situation, and luckily, there may be several options you could take advantage of.

Using Your Existing Emergency Fund

If you have an emergency fund, you may be tempted to deplete it when you need money to resolve a current predicament. But this may not be the best option for your finances.

Emergency funds are set in place to cushion you from financial instability, but depending on your current situation, you may be better off looking for funds elsewhere. It’s recommended that you only use your emergency funds for those once-in-a-lifetime catastrophes.

But if you must, make sure you use no more than 50% of whatever funds you have managed to save so far. This way you still have an emergency fund for any other financial dilemmas in the future.

Acquiring Money from Friends or Family

There are many great perks to borrowing funds from family and friends, however, just as many pitfalls.

This funding method may not be an option for many, as the amount needed to cover the full cost of a financial emergency may be too great. But if you’re able to acquire the money you need from a family member or friend, then you could save on interest rates and pesky fees. Not to mention, the repayment terms could be incredibly flexible. But there could be many repercussions if the exchange is not handled with care.

If your financial situation doesn’t improve, then you could risk the relationship you have with the individual you borrowed money from. If the terms of the loan were not gone over in detail, the miscommunication could cause a rift in the relationship between you and the family member or friend. 

Using a Quick Payday Loan

If you need a lot of monetary funds to cover the total cost of the financial crisis you are facing, then you may have thought about applying for a payday loan.

Payday loans are unsecure loans, meaning that no collateral is needed to acquire the loan. This is great news, as you do not have to risk a valuable asset like a sentimental piece of jewelry. But while payday loans offer quick financial relief to those facing an emergency with a deadline, they may not be the best option.

These quick relief loans come with many setbacks, such as:

  • High interest rates
  • Short repayment terms (2 weeks)
  • Hidden fees

The name is reflective of the repayment terms, as repayment is typically expected by the borrowers upcoming payday. If you don’t have the full loan amount plus fees by then, you risk incurring even more fees and falling further into debt.

Applying for a Convenient Title Loan

Title loans are another borrowing option that many people turn to. Just as popular as payday loans, with significantly better terms.

Title loans, unlike payday loans, are secure loans. Unfortunately, this means that collateral will be required—in the form of a car. To obtain a title loan, the borrower uses the car as collateral by giving the title to the lender for the duration of the loan.

This downside may not be so grim though, as many lenders allow the borrower to keep driving their car while making payments. And since the loan is secure, the lender may offer better terms.

Title loans could offer borrowers the following benefits:

  • Longer loan terms (up to a few years!)
  • Flexible eligibility requirements
  • Quick approval and funding
  • Competitive interest rates

Title loans are a great funding option for those facing a financial emergency due to their ease and convenience. Credit is typically not the main qualifying factor with title loans, making them easier to acquire than most other types of loans.  

Consider the many funding options available to you, including using your emergency fund, payday loans, and title loans. Consider how much you need and how long you would need to repay any money you borrow. Financial emergencies can pop up out of the blue, but you don’t have to be left adrift.    

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In a world filled with every convenience one could desire, an increased appetite for unique experiences and a unquenching penchant for credit usage, it takes serious conviction and discipline to live within our means. Unfortunately, most of aren’t succeeding; the average American carries a credit card balance over $6,000.

Unsure if you’re living beyond your means? Here are five signs that’ll spell out your situation.

You’re Paying the Minimum Balance

Most people don’t pay off their credit card balance each month. This group, known as “revolvers” amount to 65 percent of the credit card-carrying U.S. population. These cardholders are spending more than they have or they’re not paying close enough attention and costing themselves additional money. Worse when cardholders carrying a balance fall victim to the hollow appeal of credit limit increases. Per Time Money, a 10 percent increase in credit is followed by a 1.3 percent increase in debt within one quarter, and nearly a 10 percent increase in long-term debt. Add multiple credit cards and interest rates and you have a quick recipe for personal economic ruin.

 Your Debt Is Growing

This sign may go undetected, as it’s very possible you wouldn’t know the specific terms of your debt if you were living beyond your means. However, if you’re making payments on your balance(s), you can at least tell if the bill is going up or down with each new billing statement. If you’re not making headway on your balance based on your current payments, calculate how far behind you’ll be in a few months, six months, a year. Any increase in debt has the potential to quickly spiral out of control should you start missing payments.

You Don’t Have an Emergency Fund

It’s recommended to save 10-20 percent of income, but any amount is better than nothing. If you’re left with no money at the end of each month after paying your bills, thirsting for another direct deposit, you’re clearly living beyond your means. Perhaps because 69 percent of Americans have less than a $1,000 in savings—some of those people our friends, family, coworkers—we’re conditioned to think it’s more OK than it is. How will you afford the next major car repair or sudden medical bill if you have no stashed funds to your name? Saving the money we work for isn’t about depriving ourselves of the finer things in life; it means empowering us to live the life we want because of added financial protection.

You Don’t Keep a Budget

Different types of budgets will work for different types of people, but not having one is financially careless. Budgets guide our financial decisions and keep us on track toward our long-term goals. Freedom Financial Network CEO Andrew Housser regularly emphasizes the importance of budgeting and to ask ourselves where we want to be in one, three and five years. Doing so forces us to consider how our present-day actions are contributing to our goals. This usually results in more committed, purposeful budgeting and better decision-making.

In your budget, focusing on the value you’re getting for your housing, transportation, and food expenses will net you the biggest monthly savings, but it’s also important to forecast for seasonal events that will impact the budget. Attending a destination wedding? Tax bill coming up? Do you have more people to give gifts to this holiday season? Having a static monthly budget is great, but anticipating your actual calendar and financial obligations will ensure you keep pace with your budget goals, even through higher spending periods.

Your Credit Score Is Shot

Checked your credit score lately? Anything under 670 means you’ve had some dings on your financial record and lenders view you as a subprime borrower. While securing credit isn’t the single most important thing in life, it can make several expected life stages difficult, like buying a house, renting an apartment, purchasing a vehicle, or perhaps most limiting, securing a loan to start a business. If you feel like you’re exercising discipline in your financial life, a quick look at your credit score will cut your work out for you.

 Your risky financial behavior is likely showing through in other ways as well, but these five signs will surely spot an iceberg looming if it’s there.

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