To be considered as one of “Twenties Smarties”, not only do you have to enroll in 401K plan and sign up for whole-life insurance, you also need to start building an Emergency Fund. According to Investopedia.com, definition of an Emergency Fund is
“An account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to use high interest debt, such as credit cards, as a last resort.”
Your Emergency Fund needs to be separate from your main individual accounts and should cover at minimum three months of living expenses. Some people aim for 6 or 9 months of living expenses but many advisers recommend about 3-6 months and continue building the Fund as your need changes over time.
Why Do Twenties Smarties Need to Build an Emergency Fund Now?
Building a healthy Emergency Fund helps a lot with solving financial problems. Why do people get into debt? They get into debt because they do not have money or cannot cut their spending to deal with emergency expenses. Where can people get immediate money to take care of emergency situations?
If you already have a healthy Emergency Fund, you can easily deal with any emergency expenses and prevent you from building more debt and interest payments. To become a Twenties Smarties, you need to start building this Emergency Fund early because you never know when you will be dependent on this extra cash in emergency situations.
Benefits of Fully Funded Emergency Fund
Besides preventing people from racking up more debt and higher interest payments, there are other benefits for building a healthy Emergency Fund.
- Peace of mind
- Forcing you to save
- Provides flexibility late in life’s surprises
- Prevent any late fees associated with bills and helps you save money
- Helps you make better decisions as you will not be too worried about money
- Protects your retirement investment by relying on the Emergency Fund during emergency situations
Creating Emergency Fund Strategies for Twenties Smarties
Start small if you have to, but the main idea is to start building Emergency Fund now. You can easily set up an online savings account such as ING Direct and set up an automatic transfer. The mindset of needing to save should kick in and you should start making attempts to reduce your expenses. You should take a close look at where you money is going and start cutting on expenses that you really do not need such as
- Movies and DVDs
- Cable TV
- Dining out
- Stop the Sodas and desserts
Also consider shopping around your auto insurance to lower your annual premium or even consider stopping unhealthy habits such as drinking and smoking. Saving definitely involves scarifies. It may be difficult to change your spending habit but in order to save money, it must be done. For those who do not have Emergency Fund at your disposal right now, are you willing to start building your own Emergency Fund today?