Do you have car insurance? Yep.
Homeowner's insurance? Check.
What about emergency insurance? Uh...what?
Chances are you have heard of this type of insurance before, you may have just called it something different, like an emergency fund, rainy day fund, Murphy repellent, etc. It's meant to protect you or prepare you for the unexpected emergencies that inevitably come up in life. And believe me, an emergency of some sort will present itself. According to Money Magazine, 78% of Americans will have a major negative event in any given 10 year period. Are you prepared?
If not, where do you start? Start with what you already have. The average U.S. household has about $90 in coins sitting idle, according to the coin counting machine operator CoinStar, Inc. It may seem small, but it's enough to open a savings account at most local banks in your area.
How much do you need? Most financial experts recommend 3 to 6 months worth of expenses for a fully funded emergency fund. To most, that seems like a very lofty goal and could take quite some time to complete. Look at your life, what are the deductibles on your current insurance policies? Add them up and use that for your starting goal or set a number like $1000 as your beginner goal. Zig Ziglar said, "If you aim at nothing, you will hit it every time." Just set a goal that's right for you and work diligently toward achieving it.
Where should you put the money? In a savings account or a money market account is your best bet. Remember, this is not an investment, it is your "insurance" to deal with the emergencies that will come in life. Your main goal with this money is not to earn interest but liquidity. That means it's more important that you can get to the money when you need it, without penalty or hassle.
How much should I save monthly? You are the only person who can truly answer that question. Experts recommend saving 10% of your take home pay. How much you save will depend on your current budget and what you think is reasonable for you and your family.
Emergency versus I want it: Reminder, this money is to be used for emergencies only.
Here's what qualifies as an emergency: unexpected car repair, unexpected medical expense, job loss, etc.
Here's what doesn't qualify as an emergency: that great pair of shoes at your favorite store, a vacation (because you work hard and you deserve it), that lovely couch that would fit perfectly in the living room, Christmas presents (Christmas is the same time every year and can be planned for), etc.
Does that mean you can't by shoes or go on vacation or buy Christmas presents? NO! It just means these items are not emergencies and should be another part of your budget or you should save separately for these expenses, that's all. An emergency fund or emergency insurance is like any other kind of insurance, you have it to minimize your financial risk. You have it, but you hope you never have to use it. Whatever you want to call it or how much you decide you need to save, one thing is universal to all...just do it.
Misty Shay Cole is the Regional Business Development Manager at BankSouth.