Know how much to save for your emergency plan
Having money saved will give you the peace of mind of knowing you are prepared for the unexpected. An emergency savings fund can help you support yourself while looking for a new job. It can also provide a reassuring safety net in case of illness or urgent repairs to your car or home. Here's how to figure out how much you need.
Your emergency fund should be enough to cover your costs for six months to a year. To ensure your savings last as long as you need, it's important to know how to build an emergency fund properly. It should cover your major expenses, including:
- Accommodation: This includes rent or mortgage, as well as property tax, insurance and utilities. Include savings for emergency repairs to protect the value and integrity of your home.
- Food: You can lower your food costs by limiting fast food and restaurant meals. Depending on how often you eat out, you may be able to cut your food bill in half without sacrificing nutrition.
- Health care: Include medical and dentals cost and insurance. If you are laid off, you may be eligible for COBRA (Consolidated Omnibus Budget Reconciliation Act), which allows you to continue in your former employer's health plan for up to 18 months, at your own expense (which could be hundreds of dollars a month). Medical expenses are a leading cause of financial hardship, so make sure you know how to reduce your health care costs.
- Debt repayment: Your emergency savings fund should cover your minimum monthly payments for credit cards and other debt. To avoid the cost and stress of covering these expenses while unemployed, take steps now to get out of debt.
- Transportation: If you have a vehicle you will need to cover insurance, basic maintenance, fuel and emergency repairs. Don't count on selling your vehicle for emergency cash. You may no longer need to drive to work every day, but you need to be able to run errands and make it to job interviews.
- Personal expenses: Haircuts, toiletries and household supplies don't need to cost much, but they should be budgeted for in your emergency savings fund. Include life and disability insurance as well. Apart from the possible exception of an appropriate outfit for job interviews, do not buy clothes or shoes during a layoff.
- Entertainment: The stress of not working will make an evening out on the town very tempting, but these costs can add up quickly. Replace your more expensive entertainment activities with low-cost alternatives, such as having friends over for dinner.
- Travel: You're probably not expecting to go on vacation while unemployed, but keep in mind that some travel expenses may be necessary. If you are job-hunting outside your hometown or state, you may have to travel for job interviews. And if you find a job, you may need to relocate for work.
Once you know what your emergency fund is supposed to cover, the next steps are creating a budget and setting up a savings plan to build your emergency fund. Then enjoy knowing you are prepared for the future, whatever it may bring.
What's next? The benefits of a savings account