Earlier this year, I had one of those dreaded unexpected life events that threw my finances out of whack. I got into a minor fender bender and let’s just say that my Prius didn’t fair as well against the SUV/tank that I collided with. While insurance was there to help, I still had to pay my hefty deducible.
A recent survey, released by Bankrate.com, found that 1 in 4 Americans are not prepared for a similar unplanned life expense because they don’t have any emergency funds saved. Additionally, more than two-thirds are short on savings.
Experts recommend having enough savings to cover expenses for three to six months to act as a cushion to cover anything from a hospital bill, home repair, emergency travel, to car repair or replacement.
- The best and most obvious way to prepare for unexpected expenses is to save more money.
A good way to start is by setting up a direct deposit to your savings account every month. You can start with a small amount and increase the amount over time. Make sure you take a look at your budget first and set a realistic goal for what you can manage to direct to your savings each month, after all your monthly expenses are accounted for.
- Make and stick to a budget.
You can try to create your own budget with an excel sheet or by using the old "cash-in-envelope method," or you can use other third party tools like Mint to help manage and budget your spending.
- You could also look into a Roth IRA or a Health Savings Account (HSA).
A Roth IRA is a type of retirement account where you set aside post-tax income, which can also be deducted on your income tax return. The Roth IRA allows early withdrawls (before your reach 59 and a half), income tax and penalty free, for specified financial needs.
An HSA is a medical savings account available to taxpayers who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit and can be withdrawn without tax liability or penalty to pay for certain medical expenses.
- Another way to build savings fast is to increase your income.
Aside from the obvious - get a new, higher paying job, there are plenty of alternative ways you can make extra money to help build your safety net.
The reality is that many people will end up putting this expense on a credit card, many of which charge extremely high interest rates (15-22%) each month, if you are unable to pay the balance down at the end of the month.
Instead of using a credit card, you may want to look into taking out a small personal loan, to either pay for the expense directly or to pay off the credit card debt that you already accrued. The right personal loan can often offer a much more favorable interest rate than a credit card. For some useful tips, read: Four Tips that Will Help You Find the Right Personal Loan.
Many people, young adults in particular, have a “worry about it later” type attitude about personal finances and financial security. However, every financial decision can have a lasting impact, so knowing your options is essential to your long-term financial success.