Creating an emergency fund It happens when you least expect it—your air conditioning unit goes out at the house, your transmission blows in your car, or worse yet, you lose your job. So how are you going to afford to pay for those unexpected expenses—or pay your utility bills—if you don’t have a job?
You could put it on a credit card, but can you afford to make that additional payment? And when will that debt be paid off if you can only make the minimum payment? Creating an emergency or “rainy day” fund to handle life’s obstacles is a much better option, and something everyone should do.
To establish your emergency fund you need to ꢀirst do two things:
1. Determine how much money you’ll need in your fund.
2. Figure out where to get it from.
Step 1
Determine how much money you need in your emergency fund
Depending on your current family and living status, the amount you need in your emergency fund will vary. A family with children and only one income should have more money set aside than a retired individual that has steady retirement income coming in each month. As a general rule, consider the following guidelines:
Good: 3 - 6 months of living expenses
This should be enough to see you through a brief period of unemployment, cover a significant car repair, or replace a major appliance.
Better: 6 – 9 months of living expenses
This should be enough to cover a longer period of unemployment, multiple car or appliance repairs, or an unexpected medical expense.
Best: 9 - 12 months of living expenses
This should be enough to cover a combination of unexpected and unꢀortunate events.
Once your emergency or rainy day fund reaches the point that it covers a year of expenses, you should consider applying any additional funds towards any debts that you owe to pay them off more quickly. Or, consider additional funds you’re able to set aside to be available for investment – whether in an insured instrument like a certificate oꢀ deposit or money market account, or in an uninsured instrument such as a security, bond, mutual fund, or index fund if you can handle the risk. Or, consider putting any excess toward your retirement savings or educational savings for your children.
As you consider the amount you need for your emergency fund, make a list of potential unexpected expenses that may occur. Knowing what repairs or expenses may be on the horizon may help you to better prepare for when they do occur. For example, how old is your air conditioner? Is it due for a major repair or replacement?
Has your car been leaking fluids on the driveway or making the occasional, unusual noise (the kind you have to imitate for the mechanic who thinks you’re crazy when he can’t replicate it!)? Be realistic with yourself about the possibility of such expenses occurring, or worse, happening at the same time.
Tip:
Keep your emergency funds separate from the funds in your checking account. This can help prevent the urge to spend the funds when it isn’t necessary. If the option exists, consider labeling your fund for this purpose online so you will physically see the purpose of those funds. To label, or apply a nickname to any of your Arizona Federal accounts, login to your account at ArizonaFederal.org, click User Options at the top right corner of the screen, and select Change Account Nicknames from the menu presented.
Step 2
Identify your funding sources
Individuals often struggle with starting a savings account, let alone an emergency fund, but it can be a lot easier than you may think. We recommend setting aside a minimum of 10% of each paycheck toward savings (retirement, emergency fund, etc.) but even beginning with saving $25 a paycheck is a step in the right direction! If you don’t know where to start, review our Thriving on a Budget materials for tips on establishing an effective budget.
Set an ongoing savings goal:
As an Arizona Federal member (one of Us), you can use FinanceWorks™ to categorize your expenses, as well as set a budget for each category. You’ll quickly see where your money is going and you’ll be able to spot opportunities for changes. If you’re more of a paper pencil person, review your monthly statements to categorize your spending.
Once you see where your money is going, set and stick to a savings goal that will help you to create your emergency fund. If you can afford to put 10% of your monthly income toward creating your fund, great! If you can afford more, do it! If you can’t, work toward it. Keep in mind it takes time to change habits, so don’t become discouraged if you can’t meet your target one month. Iꢀ you find you’re going over budget or missing savings targets month after month, your goals may be unrealistic and you may have to reevaluate.
Tips:
It’s easier to set aside your funds for savings as soon as you get paid. Once the funds have been set aside, forget about them! If you don’t think you have the discipline to transfer the funds right away, consider setting up an automatic transfer to move the funds for you. Setting up an automatic transfer is as easy as logging into your account at ArizonaFederal.org, and selecting the Scheduled Transfers link from the gold menu bar. You can start, stop or adjust the amount at any time.
Think of your savings as a bill—you have to pay your bills each month, so why not pay yourself too? Add your savings account to your list of bills and make sure not to be late! Use unexpected or one-time sources:
If you are able to develop the discipline of using a budget or spending plan, you’ll quickly grow accustomed to a relatively fixed amount oꢀ income. So when you get a little extra, put it straight toward your emergency fund. You weren’t expecting it (in terms of your spending plan) anyhow! Examples include bonuses, rebate checks, company mileage reimbursements, tax refunds, or income from occasional side jobs.
If (and when) you come in under budget on one of your categorized expenses, think of it as a bonus and deposit the extra funds into your savings. You had already budgeted for the funds to be spent, so why not spend them on yourself by putting them into savings?
Tip:
When you get a raise, put the amount of the raise, or at least a good portion of it, toward building your emergency fund. Do so right away before you get used to the new income. Then once your emergency fund is in place, go back to your spending plan and consider where you want to make adjustments. You’ll be able to do so with a much greater sense of accomplishment if you’ve got the emergency fund in place.
Find new savings and apply them directly to your emergency fund
The best savings occurs when you discover opportunities to pay less
for something you’re already paying for. As one of Us, you have a couple of great places to look for such opportunities:
1. Stop by your local ServUsCenter for a complimentary credit consultation. We’ll review your credit report with you and look for money saving refinance opportunities (auto loan, mortgage, credit card, etc.). You may be surprised how much you can save on your monthly payment by decreasing your interest rate by a few points!
If your credit isn’t perfect, we’ll recommend actions you can take to improve your credit profile to increase the likelihood that you could qualify for lower interest rates in the future.
2. We can provide you with a complimentary insurance consultation and quote for your home, auto, life insurance policies and more.
Many individuals believe that because they’ve been a customer of an insurance agency for years they must be paying the lowest rates possible. That is not always the case – you should obtain quotes from multiple carriers at least annually, and we can do all of that work for you. Enjoy the Benefits!
Once you’ve established and set aside an emergency fund, you may experience some of the ꢀollowing benefits:
• Peace of mind, knowing you’re prepared for the unexpected.
• Less guilt when you spend. It’s easier to enjoy that vacation to the beach if you’re not overly worried about the noise the washing machine started to make the day before you left.
• The ability to decline some warranty offers. While it’s almost always a good idea to have a warranty or service contract in place for your home and vehicle, how much are you spending on extended warranties or service coverage on your phone, computer, small appliances or other electronic devices? You may still want the peace of mind that each warranty provides, but with an emergency
ꢀund available you’ll have greater flexibility to consider the cost vs. coverage of each offer.
• Savings on your insurance premiums with a higher deductible. Most premiums are reduced if you increase your deductible. For example, if you can afford a deductible of $1,000 for an automobile accident, you will likely pay a smaller premium than if your deductible is
$500, or $250. If you have an emergency fund, you may be willing to exchange greater exposure in the event of an accident for the ongoing savings on your policy.
Need Assistance?
Visit any ServUs Center location and ask a Financial Expert to help you get on the path toward establishing an emergency fund, or to set up and use FinanceWorks. Or, call us at (602) 683-1088 and we’ll be happy to walk you through FinanceWorks over the phone. Complimentary financial consultation and FinanceWorks are just some oꢀ the many services included in your membership. ArizonaFederal.org • (602) 683-1000