Protect yourself from the unexpected: Create an emergency fund
Emergency funds can help carry you through the unexpected.
Life can throw us a variety of curve balls. So, what would a financial game-changer look like for you? For many it would be reduced income, unemployment or a lack of housing/transportation. The challenge is that many consumers are either living paycheck to paycheck or spending more than they earn. In 2012, the National Financial Capability Study was conducted by the FINRA Investor Education Foundation showing the following national results: 19 percent of U.S. respondents reported spending more than they made monthly, 36 percent reported breaking even each month and 56 percent reported that they did not have a rainy day fund.
What is the relevance of this data? When individuals and families are without a rainy day fund, they are more at risk for weathering financial emergencies. This can contribute to making payments late or making partial payments. These choices can have potentially negative consequences, including:
- Late fees (average range is $15.00 - $37.00)
- Increased interest rates which can increase debt loads on existing balances
- Negative payment history on your credit report
- Decreased Credit Score
(Tip: Credit Scores are important because they impact a variety of things in our everyday lives: i.e. the ability to rent an apartment or get a job, insurance premiums and the cost of additional credit such as auto or mortgage loans).
What can consumers do to become more financially stable? Consider these tips:
- Create a budget or spending plan. Visit Michigan State University Extension for a variety of options.
- Start Saving! Even small amounts can grow over time; the key is to be consistent. It is recommended that consumers have at least three months of needs/expenses saved in an Emergency Fund. The funds should be easily accessible.
- Pay yourself first! Make a commitment to set a certain amount aside each month, either by making a deposit into an account at a bank or credit union or signing up for automatic transfer from your checking into your savings.
- Consider the value of compound interest. This is interest that you earn on your original investment, plus the interest that accumulates over time.
- Find ways to reduce spending to save more. Consider bringing a lunch instead of eating out, buy generic versus name brands, use coupons, and comparison shop. The list is endless so be creative and have fun.
Michigan State University Extension offers financial literacy and homeownership workshops throughout the year to help you become financially healthy. For more information about classes in your area, please visit either the MSU Extension events page or MI Money Health website. Additionally, you can take the Financial Health Survey at MI Money Health to access if you’re financially healthy and discover more ways you can improve your financial health.