Home | Personal Advice | Personal Columnists | Arla Wallace
Arla Wallace is an accounting professional with over 20 years experience. She spent several years working for both publicly-traded and private entities before founding her own business. Today she partners with small business owners so they can focus on operations while leaving the responsibility of staying on top of accounting tasks to her. She is a Certified Public Accountant (CPA) and a Certified ProAdvisor for Quickbooks Online.
|
|
Building an Emergency Fund What is an emergency fund? Saving money for unforeseen expenses makes sense. Most likely, you have experienced an unexpected financial emergency—a car accident, wind or water damage to your home, a medical injury, or loss of a job. An emergency fund can help you recover from financial shock following an unplanned event without having to increase personal debt. Emergency savings can be used to cover essential expenses like food and housing so you can get back on track quickly. Keep in mind that an emergency fund is separate from long-term savings, like retirement savings or funds set aside to purchase a home. Building an emergency fund The initial step to establishing an emergency fund is to determine your savings goal. Depending on your circumstances, the total in your emergency fund should equate to three, six or even 12 months of living expenses. This goal will depend on whether there are multiple sources of income as well as whether there are multiple dependents to support. Next, identify the amount and frequency of savings you can contribute to the fund. This step may require you to cut unnecessary expenses, such as dining out, subscriptions, or shopping trips. Once your emergency fund starts to grow, you may be tempted to spend that money. Make it clear to yourself what situations will prompt you to use the emergency money. For example, ask yourself whether the expense is unexpected, necessary, or covers an urgent need. If you withdraw money from your emergency fund, repay the funds as soon as possible. Once you reach your emergency fund savings goal, you can stop contributing. Because emergency savings are likely in a bank account earning a low return, there is a point to which you can save too much. Excess savings above your emergency fund goal can be used to pay down debt, invest in a retirement account, or be placed into a higher-yield savings account or money market account so that your money can grow. Financial Peace of Mind Preparing for the unexpected is a good financial habit to adopt in order to avoid having to take on debt when emergencies occur. Failure to plan may result in a one-time emergency expense. This may end up growing larger than the original debt due to the addition of interest and fees that result when reliance is placed on credit cards or loans. Take charge of your finances. Be mindful of account balances, save money for emergency and non-emergency purposes, and spend wisely. |