Protect yourself with an emergency fund
A recent study found that 40 percent of families made a significant unplanned payment within the past year of roughly $1,500. Funds were used to cover expenses like medical bills, auto repairs and other major expenditures, and in many cases it took over a year to recover.*
You can protect yourself from the unexpected by setting up an emergency fund — a
savings account designated for unexpected financial emergencies. Emergency funds should be easily accessible in a savings account.
How much should you save? Experts differ in their opinions, but most recommend saving anywhere from three months of living expenses to nine months of income. While this might seem like a large amount, don’t let that stop you from getting started. Even if you only manage to save one month’s salary, it can mean the difference between keeping in the black or dipping into credit. Speaking of credit …
Try not to depend on a
credit card for emergency expenses — paying back the amount you borrow, plus interest, will take longer and amount to more than if you had saved the money.
Saving vs. borrowing
Let’s say you get hit with a car repair for a new catalytic converter that costs $1,500. Here’s a comparison of how saving and borrowing stack up.
Saving:
If you saved $100 per month for 15 months you’d have $1,500.
Borrowing:
If you charge $1,500 to your credit card and pay it back at $100 per month at an 18 percent interest rate it would take you 18 months and you would pay an additional $212 in interest.
* Source: JPMorgan Chase & Co., Feb. 9, 2017.