Emergency Savings Series: Part 1

Short Term Emergency Savings

Building emergency savings is an important goal on its own and it goes hand in hand with debt reduction. Think about it.....if you have money specifically set aside for emergencies, you won’t have to add to your credit card balance, take on new debt, or redirect money from another goal when the unexpected happens.

Emergency savings are for: 

• Short-term emergencies—one-time occurrences like repairing your vehicle or replacing a major appliance. 
• Long-term emergencies—ongoing situations like a job loss, pay cut, disability or other interruption in earnings. 

Short-term emergency savings 
If you have a fender bender and have an insurance deductible, how will you pay for it? If your furnace or air conditioning goes out, where will the money come from to repair it? What about an unexpected dental or medical expense? Would you be able to pay it up front or be forced to put it on your credit card?

When you have a short-term emergency fund, you can use your savings to pay for these types of expenses instead of incurring more debt.

How much do I need to save? 
This is the million-dollar question—but the answer varies for every situation. Instead, ask yourself, “How much do I need to have set aside to feel more secure?” Answer that question—then decide what approach you’ll take to reach your goal. Here are two approaches to consider:

1. Choose a specific dollar amount as a goal, $1,000 is a common amount. Think about what kind of emergencies you could weather with $1,000. Maybe you’d feel OK at $500, or would be more comfortable with $1,500 or $2,000. You decide. 
2. Put some numbers behind your goal: 

• Add up the deductibles for your home or renters insurance and vehicle insurance. 
• Look back at the last year. How much did you pay for vehicle repairs and other emergencies? Include that figure in your total. 
• Add in the average cost for a household appliance or other potential expense. 
• Total those items and any other potential one-time emergencies and use that amount as your target. 

Once you have your short-term emergency savings, you can set your sights on long-term emergency savings