When you’re just starting out, there are so many things you need to think about. How much rent can you afford? What will your monthly bills be? And, perhaps most importantly, how much can you put aside for unexpected expenses? It’s easy to get caught up in the day-to-day of paying bills, but it’s crucial that young adults understand the importance of a budget from the beginning. In fact, financial experts agree that it is one of the most important habits anyone can develop early on in their career. With any new life stage comes brand new challenges and responsibilities. Whether you’ve just finished school, started a new job or moved into a new apartment with roommates – these changes almost always bring with them expenses that we’re not used to having. If you haven’t already done so, now is the perfect time to start creating a solid budget and emergency fund so that you’re not caught off guard when these big expenses come around.
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What is an emergency fund?
An emergency fund is a special savings account that you put money into for unexpected costs. These are things like car repairs, doctor’s visits or a broken dishwasher. Your emergency fund should be large enough to cover three to six months’ worth of your average monthly expenses, since it can take that long for you to find the money elsewhere. Whatever you put into your emergency fund can’t be used for things like groceries or rent. Emergency funds are essential, particularly when you’re young. No one knows what’s going to happen, so it’s wise to be prepared for anything. If you don’t have an emergency fund and you need to pay for something that you don’t have the money for, you may end up having to take out a loan or get help from a family member. Both of these options can have negative consequences in the long run.
Why is it important to have an emergency fund?
Even though you can’t predict what will come up, you can be prepared for it. Having an emergency fund and maintaining a budget for other expenses will make it possible for you to handle nearly any situation. As a young person, you may not have a lot of savings and you may not be able to take out a loan from a bank if you need to pay for an expense. In some situations, you may even be denied a loan due to your age. This is why it’s so important to have an emergency fund that you know you can rely on.
How much should you put in your emergency fund?
Most financial advisors recommend having at least three months’ worth of your average monthly expenses saved in an emergency fund. If you’re in a career that you expect to be volatile, like the arts or journalism, you may want to aim for six months’ worth. It’s important to remember that your emergency fund is different than your other savings. You should be saving money towards goals like paying off a loan, saving for retirement or buying a house. While these are very important goals, they can take a long time to achieve. By contrast, the money you put in your emergency fund should be easy to access quickly.
Decide what’s most important to you.
As you begin to create a budget, it’s important to recognize that not all of your expenses are created equally. It’s likely that you have monthly expenses like rent, groceries, utilities, etc. These expenses are important, but not quite as urgent as others. For example, if you have an upcoming car inspection and you need to replace your car battery, it’s advisable to use money from your emergency fund instead of putting the expense on your credit card. Once you’ve used your credit card, you’ll have to pay it off – and that will tack on an extra monthly expense.
Track all of your expenses for a month.
It can be really helpful to track your expenses for a month so that you know what you spend on each category and how much you spend overall. For the next month, keep track of every single thing you spend money on and put it in a designated notebook or app. From there, you’ll be able to see where you’re overspending and can adjust your budget accordingly. By tracking your expenses, you’ll know exactly how much money you have left over to put towards your monthly bills and your emergency fund. You can also see which categories are eating up your budget, which will help you adjust your spending accordingly.
Don’t forget about your important monthly expenses.
As you’re creating your budget and planning for big expenses, don’t forget about the little things that add up. By the time you realize you don’t have enough money in your budget for a car inspection or a trip to the dentist, it might be too late to save up for it. It’s important to plan for all of your monthly expenses, as well as any big expenses you know are coming up. Most car insurance companies allow you to set up an autopay option, which can help you save money on your monthly bill. The same goes for your cell phone bill and other regular expenses that may be required of you (like student loans or a health insurance premium). This way, you’ll have plenty of money set aside for these expenses and won’t have to worry about finding the cash at the last minute.
As you move into a new life stage, it’s important to start creating a budget and saving for unexpected expenses. Your budget will help you stay on track and make sure you have enough money for everything you need, while your emergency fund is there to protect you when the unexpected happens. It’s not always possible to plan for every expense that comes up, so having access to a fund that you can draw on when you need it is essential. Creating and maintaining a budget is a great way to stay on top of your expenses and protect yourself against future financial problems. But it’s even more important to make sure you have an emergency fund in place. If you don’t have an emergency fund, now is the time to start saving.
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