Emergency Fund Essentials for Homeowners and Future Buyers
When it comes to personal finance, one of the most important tools for financial success is establishing and maintaining an Emergency Fund. What does an emergency fund consist of and what should it be used for? In this blog, we will discuss why you should have an emergency fund, how much you should keep in it and how to successfully build one.
Why You Need an Emergency Fund
Whether you’re renting, planning to buy, or already a homeowner, having an emergency fund is essential for managing unexpected expenses.
Here are a few types of unexpected expenses that you need to be prepared for:
- Protection Against Job Loss or Reduced Income
- Home Maintenance and Repairs
- Natural Disasters or Car Accidents
- Health Issues
- Debt Relief
- Peace of Mind
Amount You Should Allocate to an Emergency Fund
The general rule of thumb for establishing an emergency fund is to set aside 3-6 months’ worth of expenses. Doing so will ensure you have a cushion of cash to cover housing costs, miscellaneous bills and essentials like groceries during a temporary financial setback.
If you are a homeowner, you may want to consider saving more than 3-6 months of living expenses. Homeownership brings additional costs, such as property taxes, insurance, mortgage payments, and maintenance. (For homeowners, it’s a good rule of thumb to consider saving 6 months to a year’s worth of living expenses).
The first step in determining how much you save is to calculate your essential monthly expenses. This includes things like:
- Rent or mortgage payments
- Utilities
- Groceries
- Insurance premiums
- Loan repayments
- Transportation costs
These are your primary expenses. Once you have an accurate total of these monthly expenses, you’ll know how much you need to cover your basic living costs.
Successfully Building an Emergency Fund
Building an emergency fund doesn’t have to happen overnight. However, you do want to make it a priority and stay consistent. Here are a few steps to help you successfully build your emergency fund:
Set a Clear Goal
Before you start saving, determine how much you need. Start by calculating your monthly expenses, including your mortgage, utilities, insurance, groceries, and any debt payments. Multiply that by 3 or 6 months to set your savings target. This gives you a set goal to work towards and helps you stay on track.
Start Small and Stay Consistent
You don’t need to save your entire emergency fund right away. Start by setting aside a small, manageable amount each month. Even $100 or $200 a month can add up overtime. The key is consistency. Automate your savings by setting up monthly transfers from your checking account to your emergency fund, so you don’t have to think about it. Over time, you’ll be amazed at how quickly your fund grows.
Cut Back on Non-Essential Spending
Building an emergency fund requires discipline, and one of the best ways to accelerate your savings is by cutting back on unnecessary expenses. Review your budget and identify areas where you can reduce spending. Doing this could be dining out less, canceling unused subscriptions, or shopping more strategically. Redirect these savings into your emergency fund.
Use Unexpected Monetary Gifts to Boost Your Emergency Fund
Any unexpected monetary deposits, such as tax refunds, bonuses, or a side gig income, can be a great opportunity to give your emergency fund a boost. If you receive extra money, consider putting a portion of it directly into your emergency fund rather than spending it on non-essentials.
Keep Your Emergency Fund Separate
To avoid the temptation of using your emergency fund for non-emergencies, keep it in a separate account. Doing this will help you keep the money separate and help it grow.
Monitor Regularly
As your financial situation changes, whether you get a raise, pay off debt, or make lifestyle changes, it’s important to reassess your emergency fund. If your living expenses increase, your emergency fund goal should increase as well. Regularly check in to ensure you’re on track to meet your goal.
An emergency fund is one of the best ways to protect yourself from financial setbacks. Using these same savings tactics can also help if you are looking to become a homeowner one day. Whether you’re a renter, homebuyer or homeowner, it’s always a good idea to have an emergency fund. Set clear savings goals, stay consistent, and cut back where you can. Doing these things will help you reach your goal and save you stress and headache of unexpected occurrences in the future.
Contact one of our trusted Southern Trust Mortgage loan officers today if you’re ready to make a move this new year. Happy saving!
