How to Build a Family Emergency Fund

Building a financial safety net is a fundamental tool in financial planning. Assuming you already have six to eight months of emergency funds (as recommended by financial experts) for yourself and your monthly expenses, next you may want to consider a family emergency fund.

The pandemic highlighted the need for an emergency fund—particularly for those with extended family to support. The money you save should focus on essential needs and potential must-haves, usually revolving around loss of income or health events, (as opposed to setting a specific goal, such as a vacation), and saving until you reach it.

First, what's an emergency fund? An emergency fund is a savings account that covers a household's unexpected expenses. It is dedicated to unplanned situations and is a fundamental part of successful financial planning.

This article assumes you already have reserve savings if you or your significant other experience:

• Loss of income/unemployment
• Urgent medical treatment (see box below for more information)
• Death or disability in the family
• Increase in monthly loan installments
• Necessary home repairs
• Critical car repairs

Now, what's a family emergency fund? A family emergency fund is a separate savings account that covers financial aid to family members most often not living in your home. For example, aging parents may need help in covering medical expenses, assisted living costs, and even funeral expenses. Alternatively, a sibling might face an unexpected financial hardship and benefit from assistance. Family emergency funds can also double as moving funds if relocating is favorable for you or a family member. It is dedicated to unplanned financial hardships to anyone in the family you may want to help.

Why are both an emergency fund and a family emergency fund so important? Today's surging inflation adds to the uncertainty and difficulty in starting a family emergency fund, but it doesn't make it any less important. The counter argument that it's even more important can be made.

Bottom line: These funds are a safety cushion that either eliminate completely or minimize debt accrual. We all experience unexpected expenses at one time or another; expenditure from a dedicated emergency fund reduces use of credit cards or loans to cover costs.

How do you build a family emergency fund? This is accomplished much the same way you built a personal emergency fund.

1. First, conduct a deep dive into your family's monthly expenses and sort them into essential and discretionary. Analyze ruthlessly.
2. Determine how much to save. Financial experts typically propose between six to nine months' worth of expenses saved in emergency funds. A family emergency fund is a bit different, but you can use that as a starting point and work up or down from the amount. You can also research scenarios which may use the funds, such as averages of hospital or medical bills and assisted living costs. Remember, any amount will be helpful, so don't stress yourself into saving tens of thousands of dollars unless you can do so comfortably.
3. Decide how much of your discretionary income to contribute bimonthly or monthly once you've identified a family emergency fund savings goal. This commitment and dedication can strain an average family's budget so it's helpful to break the goal into more manageable goals.
4. Divide the target goal into smaller goals. One way to do this is to consider saving for a smaller expense first, such as medication costs, and then build upon that. Another option is to consistently deposit modest amounts into the family emergency fund account. Once you reach the smaller goal, you'll be able to reassess and adjust your contributions until you meet your overall, larger goal. These tactics can aid in positioning the larger goal as less overwhelming.
5. Budgeting and prioritizing are of utmost importance when saving for a family emergency fund. For example, it's reasonable to cut or reduce the frequency of eating out for a while. Even small perks such as takeout or daily coffee runs use discretionary money which affect your ability to save. One highly successful approach is to immediately transfer any unexpected or one-time deposits into the family emergency fund, including merit increases or bonuses from work.
   
   Tip: If you are currently making payments to personal loans or credit cards, prioritize the high-interest debt first.
    
6. How long should I keep saving? Short answer: However long it takes to reach your goal and for you to feel prepared to financially assist a family member experiencing hardship.

Same as with your own emergency fund, once you reach your family emergency fund goal be sure to maintain the balance.

In the end, the best practice for saving and maintaining a financial safety net for yourself or extended family is a mix of actively cutting specific conveniences, reigning in a few small luxuries, and regularly allotting discretionary income toward your savings goal. This includes smaller sums from unexpected refunds or extra change to larger amounts like bonuses and job raises.

Building a substantial emergency fund takes time. It requires discipline from the entire household. To make the journey easier, patience is crucial as is having a clear goal and buy-in from immediate family members.

Remember, the best-case scenario is you never have to disburse a family emergency fund. But future-you will thank past-you for doing so if the need arises.

Medical Debt Removal from Credit Reports

If past medical paid debt ever appeared on your credit report, it's worth checking to see if it's been removed recently. Under prior practice, such debt could remain on your record for seven years. However, now the three large credit reporting firms—Equifax, Experian and TransUnion—no longer include medical debt after it's paid.

Additionally, consumers now receive a year (up from six months) before unpaid medical debt passes to a collection agency and appears on credit reports. But wait, there's more! In the first half of 2023, the credit bureaus will cease to include unpaid debts less than $500 on credit reporting.

It's estimated the aggregate changes will improve credit scores for millions of Americans. The credit agencies report the new policies will eliminate roughly 70% of medical debt from credit summaries. Consumers are encouraged to confirm their paid medical debt no longer appears on their credit report.

How to check your credit report

• Obtain a free copy of your report from each credit agency, Equifax, Experian and TransUnion, at annualcreditreport.com. Through the end of 2022, you can get free weekly reports through the site instead of the usual once per year.
• Look specifically for medical debt that was paid in full and should no longer appear on your report under the new rules. Check the section that flags new debt as well as the “account information” or “collections” sections of the report.
• If the report happens to list debt you've already paid, or any other error, dispute it directly with the credit agency whose report includes the mistake. Each of the agency's reports may contain different information, so check all three. With some exceptions, federal law requires the credit bureaus to investigate disputes within 30 days and notify you within five days once the investigation concludes.
• If your dispute is denied or the error is not removed from your report, file a complaint with the Consumer Financial Protection Bureau.

^{Resources: cnbc.com, marketwatch.com, point2homes.com, NextAdvisor, LLC, uspirg.org}