Benefits of an emergency car fund
Establishing an emergency car fund has several benefits. Read on to find out what they are:
1. Reduces stress: If you are suddenly faced with an emergency such as engine failure or other car trouble, the first reaction is stress and anxiety of the financial repercussions that follow. However, having an emergency car fund can cushion this blow and allow you to pay for your car troubles without being financially concerned.
2. Encourages saving: When you start your emergency car fund, you will be motivated to put money into it rather than spending it wastefully such as on luxuries.
3. Avoid bad debt: Having an emergency car fund can help you avoid using avenues that lead to bad debt, such as credit cards. Thus, if you need the funds for your vehicle, you can pay it through the emergency fund instead of being stuck with additional interests or fees in the long run. An emergency car fund can also help you get out of debt and cover for situations that you did not budget for. This includes car repairs, accidents, or medical care.
4. Beginning to budget: If you are looking to be more mindful of your money and start to budget, chances are you will leave out certain expenses that must be part of it. This includes car services, gifts, or taxes – out of sight, out of mind, right? However, having an emergency car fund in place helps you pay for these until they are added to your yearly budget.
5. Single income: If you are single or are part of a single-income family, an emergency car fund can help pay for any unexpected situations such as car repairs and breakdowns. It is recommended to have one year’s worth of expenses in your emergency car fund, especially if you have a single income.
Setting up an emergency car fund
Now that you know the benefits of starting your own emergency car fund, let us tell you how you can do it.
1. The easiest way to begin is to set aside a percentage of your monthly salary and transfer it to the fund. Begin by setting a target of what you want your emergency car fund to be. This can be equal to three months or six months of your salary, or more. Once you have your target in place, you can keep aside the percentage of your salary every month that will help you achieve your target. So, if your target for the emergency fund is $6000, you can allocate $500 per month to meet your goal in one year. If you have additional funds, you can increase your monthly payments so you meet your target earlier.
2. Another method to build your emergency car fund is to save windfalls such as economic impact payments, tax refunds, and rebates you receive and allocate it to a dedicated savings account, which is then your emergency car fund. You can also automate your savings and set up automatic transfers that deposit an amount of your paycheck to the fund on a regular basis.
3. Use cashback apps to earn back a percentage of what you spend on several purchases including shopping and dining. Instead of spending this, transfer it to the emergency car fund for future use.
When deciding how much money you should have in your emergency car fund, consider the following factors:
1. How many people you have in the household
2. How many cars you have
2. How many people in the household earn a salary
3. The minimum amount you need to meet monthly expenses
4. How stable the sources of your income are
5. The condition of your vehicles
Best places to build your emergency car fund
Now that you know how to build your emergency car fund, we will tell you the best options to grow it:
1. High-yield savings account: Found in online banks, high-yield savings accounts can provide you with a higher interest rate as compared to the traditional savings accounts. These high-yield accounts can offer anywhere between 0.50% to 0.81% interest annually. When choosing a high-yield savings account, consider the fees, withdrawal rules, and any perks offered.
2. Money market account: Similar to high-yield savings accounts, money market accounts may require a higher deposit to open the account. They may also offer you a debit card or chequebooks, enhancing convenience when it comes to withdrawal. Another advantage of money market accounts is that they can be open at online and brick-and-mortar banks. However, online banks may provide higher interest rates.
3. Certificate of deposit (CD): With this type of option, you will need to keep your money aside for the required period of time after which you will receive a guaranteed return. Depending on the type of account you choose, this could range from six months to 5 years. The advantage to this, however, is that you will receive a higher interest rate than traditional accounts.
For more information on emergency car funds and how they can help you, contact Special Interest Automobiles today.