I came across an article the other day on Bankrate that talked about what percentage of American’s could pay cash if they had an emergency or an unexpected expense of $1,000. The surveys that Bankrate has done found that less than 40% of Americans would be able to cover an emergency or an unexpected expense of $1,000. Less than 40% of Americans have $1,000 in their bank account that they could afford to spend on an unexpected expense. Think about that for a minute. Think of 10 people that you know. Based on these statistics, it is likely that six of them would not be able to cover a $1,000 unexpected expense with cash.
If less than 40% of Americans could cover an unexpected $1,000 expense, then that means that more than 60% of Americans would likely have to take on debt in one form or another if an unexpected $1,000 expense presented itself. To me, that is an alarming statistic and just goes to exactly how important having a budget is!
Establishing an Emergency Fund
I like what Dave Ramsey teaches on emergency funds. He instructs people to make saving and setting aside $1,000 the number one priority when establishing a budget. What you do is save up $1,000 and put it in the bank, and then – get this – you don’t spend it. You leave it there! Once you do that, you will have the cash on hand to cover an unexpected $1,000 expense.
As you go through your budgeting journey, you can build up several miniature emergency funds. For example, you could have a car maintenance fund that you add $75 to each month. You’re probably not going to spend $75 each month on car maintenance. Sure, every now and then you will have to change the oil or rotate the tires and even get new tires when they are needed, but you shouldn’t have to do those things every single month. So, that $75 each month goes in to car maintenance. At the end of the year, you have saved a total of $900. Now let’s say you spent $300 in standard maintenance like oil changes and tire rotations over the course of that year. You have $600 left over that can be put toward covering any car-related emergency that you might have! Even though $600 might not cover every car-related emergency in its entirety, it will help you not have to deplete your main emergency fund to cover a car problem.
You can also build up miniature emergencies for things like house repairs if you’re a homeowner and medical emergencies. For medical emergencies, I would recommend setting aside enough cash to cover your out-of-pocket max. For house repairs, I would just pick a monthly amount that you are willing to set aside in savings to pay for things like a new hot water heater when the one you currently have decides to stop working. Whatever amount you decide to set aside each month to save to pay for house repairs, I would put a limit on the total savings amount. Maybe you set the limit at $1,000 for house repairs or maybe you set it at $5,000. That’s entirely up to you. I just don’t like the idea of you continuing to contribute your money to something like house repairs if you have enough saved up. There comes a point at which you have enough saved and continuing to save would be overkill.
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I have not taken anyone’s specific financial situation into consideration and this is not intended to be used as personal financial advice. This is for educational purposes only and is simply based on my opinions.
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