The number one personal finances mistake everyone makes is not preparing for financial emergencies. In my decades of working business and consumer accounts receivable, I have seen hardly any other reason as to why people and companies fall into a state of financial trauma other than things came up that they were not financially prepared for.
It is not an exaggeration to say that, regarding consumer credit reports, the most often reported unpaid delinquent accounts are often medical. Unpaid and past due medical debt accounts for the largest portion of negative reporting to personal credit reports in the United States. And most of these people had medical insurance of some kind.
However, a financial emergency need not be all that dramatic. In fact, it can be something that at first, seems so innocent that it is not recognized as a financial emergency, until it becomes one. For example, I once had to counsel a man because he could no longer afford his house payment; but the reason why he could no longer afford his house payment is the key. This man had an adjustable rate mortgage, and at the time his ‘situation’ occurred, he had a very low interest rate and low house payment of $550. Then one day, his daughter’s school rented flute came up missing. While they were looking for it, his daughter needed a replacement flute so he put down another $50 on a new school rental. No big deal. Only it was. That man didn’t have an extra $50 in his wallet to spare, he was living payday-to-payday like a lot of Americans. Therefore he took the $50 out of his mortgage payment intending to make up for it by the end of the month if not the next month. In his mind, no big deal. Except that without making a full mortgage payment, his due date could not advance and therefore a late payment to a secured debt was reported on his credit report. When this happened his credit score went down and his adjustable rate mortgage adjusted its rate and his payment went up to $663. That was $113 more than he could afford. Now he not only had to pay an extra $50, but he had to come up with an extra $113 each and every month. He could not do so. I did help this man through loss mitigation, but by then it was too late. Although the loss mitigation put him back on track with an affordable house payment, his credit was already damaged and his money behind schedule.
Understand that emergencies will come up. At some point, or at several points in your life, you will have expenses come up that are not avoidable that are also not planned for in the budget. No matter how well you make your budget you cannot account for everything. That is why emergency savings funds are so important.
The commonly suggested amount for an emergency savings fund is three months worth of income for the household; they say to save the equivalent of three months salary.
I am going to say that any amount you can save is a good amount, even if it is just $50 and do not stop saving when you reach the equivalent of three months salary.
Every time you get paid, pay yourself first. Take a portion of your net salary, no matter how small that portion is, and put it into a savings account at a financial institution that does not house any of your other accounts and do not let them give you a debit card or withdrawal slips for this account. Make it a distant, inconvenient account to get your money out of. Every time you get paid put money into it before paying your bills. It doesn’t matter if over six months you only manage to put $250 into it, that is $250 you did not have before and it might make all the difference in the world someday.
Saving money should not be an option. And do not let how little you can afford to save be an excuse not to.