emergency fund

Build an Emergency Fund When You’re Already in Debt

Are you financially prepared for an emergency? More than a quarter of all Americans have no savings stored up, and nearly three-quarters lack enough savings to cover six months of expenses, a 2013 Bankrate survey found. Being financially unprepared for an emergency leaves you vulnerable in the event of a job loss, a sudden medical or car expense or a natural disaster. The result can leave you struggling to pay for short-term necessities while damaging your long-term credit. Your best insurance against this scenario is building an emergency fund to prepare for the unexpected.

Set a Savings Goal

How big should your emergency fund be? For many years, experts recommended you save enough to cover three to six months of lost income. But in a post-recession economy, the National Foundation for Credit Counseling advises you save enough to handle nine to 12 months of expenses. This can buy you time in case you need to look for work while covering rent, insurance, credit card payments and other bills.

Start Small

On a tight budget, saving up the equivalent of a year’s income may seem daunting. In this situation, experts like financial writer Michele Lerner recommend setting aside a more manageable amount per month, such as $100 or 10 percent of your paycheck. If necessary, you can finance this with measures such as adjusting your tax withholdings, doing part-time work, selling services, holding yard sales or renting out a room or vehicle. To automate your budgeting routine, you can arrange to directly deposit your allocated monthly amount into a savings account.

Cover Your Debts

If you have debt, you may be able to grow your emergency fund faster by paying down some of what you owe first. High balances and interest on your credit cards and loans can eat up money you could otherwise be putting into your savings.

Financial expert Dave Ramsey recommends that after you establish an initial emergency fund of $1,000, you should begin paying off your non-mortgage debts, starting with your lowest balance first. The resulting decrease in your monthly payments will give you extra money you can then put toward increasing your emergency savings fund. If you’re owed money via a structured settlement, consider inquiring with a company like J.G. Wentworth to sell your future settlement payments for a lump sum now. That money could then be used to pay down your debt and build your emergency fund.

Increase Your Savings

After you’ve paid down some of your debt, you can continue growing your emergency fund to the recommended level. This can then become a foundation for building your lifelong savings. Fidelity Investments recommends you save at least eight times your ending salary to ensure you don’t outlive your savings. As a rule of thumb, for most people this amounts to saving 10 to 15 percent of your income, with appropriate adjustments based on factors such as age, spending and investments.

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