Here's the thing: Emergencies always seem to happen to other people—until the day you find yourself stranded on the side of the road with a flat tire and a zero dollar balance in your savings account. And for this exact reason, it's wise to set away some money so you have some cash on hand in case of dire times. As financial expert Elle Kaplan says, "Building an emergency fund isn’t about pessimism; it’s about practicality."
Consider how this approach applies to other areas of your life. "When you buckle up your seat belt, you don’t expect to get in a fender bender, but you know it’s a smart, preventive step in case anything does happen," Kaplan points out. "The same goes for an emergency fund—you don’t expect financial surprises, but you should still have a monetary safety net in case they occur."
But what we should do and what we actually do, especially when it comes to money, doesn't always add up. According to a recent survey, most Americans don't have so much as $500 socked away for an emergency, and that's no good. Unsure of where to get started when it comes to your own emergency fund? Here are five expenses you should prepare for this year, and just how you can reach your savings goal for each one.
1. You've made a career change—the good or bad kind.
Whether you'll make a leap to a new but lesser-paying profession or you become the victim of a round of layoffs, you may face a career change this year that could cause you to financially fumble. With an emergency fund in place, however, you can stay cool as a cucumber when career change comes your way. Kaplan advises setting aside six months of living expenses in your emergency fund earmarked for such an occasion. Of course, the money you set aside is for basic living expenses only, such as your rent, monthly bills, and groceries. "Going on a shopping spree at the mall or on an exotic vacation will have to wait until you get a new position," Kaplan says.
That said, six months of expenses is still a big chunk of change. But there's a simple way to make sure you save it up: Automate your savings now, while you've got a steady paycheck in place. Decide what you'll need to sock away, then divide that number by the number of paychecks you'll get this year—and chances are you won't even notice that 50-odd dollars is missing. "By setting it so money goes directly from your paycheck into your savings account, you’ll have a fully funded fund before you even know it," says Kaplan, who adds that, "even one percent stowed away from each check can make a world of difference."
2. Your BFF is getting married—and you need to get her a good gift.
You may have had an inkling your BFF's boyfriend was ready to pop the question, but until he put a ring on it and she announced their wedding date, you weren't exactly saving up for a present. Now the big day is just months away, and that wine cooler she's got her eye on doesn't exactly fit into your monthly budget. Or maybe it isn't an expensive gift but a series of $20 birthday gifts that could break your budget. "While these may not be emergencies, they’re expenses that will pop up frequently—and you should anticipate these gifting moments for your family and friends," says Onisa Treibs, vice president and branch manager of Fidelity Investments’ Southlake Investor Center.
It's likely that without the necessary cash in your purse and no money in savings, you'd charge the gifts to a credit card. But that's exactly where you should look to save up for these unexpected expenses, Treibs says. If you have a cash-back credit card, "commit to saving all that cash back right into your emergency fund," she says. "That way, what you’re already spending is actually helping you save." For people without cash-back credit cards, look to your latte addition. "One less latte may mean $5 toward your friend’s wedding gift," says Treibs. By cutting back on your caffeine intake, you could have enough saved for gifts for your friends and yourself.
3. Your brake pads need swapping out.
You knew the second you drove the car off the lot that it lost value, but you didn't count on needing to replace those brake pads—or any other number of vehicle ailments—quite this soon. That's the thing about cars: "Like it or not, they will need repairs at some point or another," says Kaplan. "And when your auto does need a fix-up, you don’t want to be stuck racking up debt on your credit card."
If you want to beef up your broken-brakes fund, Kaplan says the easiest way you can save up is to cut back on your travel-related expenses. "When you start to add it up, you’ll be amazed at how much you waste on gas," she says. So rather than meet your friend out for dinner, ask for a ride to the restaurant. Start a carpool with your coworkers. Organize your errands geographically so that you don't drive more than necessary. And stash that saved gas money for later.
4. Your water heater breaks—midshower, of course.
Homeowners should always be prepared for something that needs a replacement or that goes kaput in their space. And even if you're a renter, you could be hit with unexpected housing expenses, especially if you don't carry renters' insurance. "You may need to spend money on a handyman if you have a leak in your sink or your refrigerator stops running," says Treibs, "but if you’ve been saving, you’ll be ready if these emergencies happen."
You can turn to your house—literally—to save up for these kind of unexpected expenses, Treibs says. Make a commitment to do date nights in with your significant other at least once a month. "Make dinner together and watch a movie instead of going out on the town, or get friends together for game night with a BYOB or potluck invite," she suggests, then stash the money you saved in your savings account
5. You come down with a sinus infection.
OK, so a sinus infection itself won't break the bank. But when you can't get into your primary care physician and you're forced to go to the ER for antibiotics, your copay just might. And "the last thing you want to worry about when you’re sick is how to deal with it financially," says Kaplan. "By accounting for health care expenses in advance, you can direct all your focus toward getting better if bad health happens."
Your insurance comes with a deductible—the out-of-pocket cost you'll have to hit before insurance will really kick in—and Kaplan says its smartest to save up that amount, plus your average prescription costs, in your emergency fund. First, Kaplan says, "consider shopping around with your insurance to find one that cuts down on the money you’d need to stow away in a health emergency." After that, boost your savings account and your overall health with this easy savings plan: Pack your lunch at least three days a week, says Treibs. That could add up to $30 a week, or more than $6,000 a year, which will cover your deductible and then some.
