WHY HAVING AN EMERGENCY FUND IS AN EMERGENCY

These days, many people are living paycheck to paycheck, barely making ends meet. Not having an emergency fund could quite possibly send some of us into bankruptcy if the right (or wrong) unforeseen event took place, like a job layoff, an auto engine failure, a house fire or flood, or worse.

What you might need to use an emergency fund for:

1. You might need an emergency fund to pay your living expenses if you lost your job.
2. Your heating or air conditioning system or some other large appliance could break down and need to be repaired or replaced.
3. Your car could break down and need to be repaired or replaced. You might need to have a new engine or you might need the money to pay the insurance deductible.
4. Injury or sickness could land you or a family member in the hospital and you may need to use the emergency fund for the insurance deductible.
5. Unforeseen home repairs might need to be paid for with your emergency fund. A new roof not covered by homeowners insurance could set you back quite a bit financially.

Why you REALLY need to have an emergency fund:

1. You are ready to deal with an emergency if one arises. You never know what might happen at any given time, and knowing that you can handle a crisis gives great peace of mind.
2. In an unplanned event you won’t have to scramble around at the last minute to figure out where in the world your money is coming from and how to go about getting it.
3. Having an emergency fund in place will keep you out of debt. If you DON’T have an emergency fund and an unexpected event crops up, you might have to use your credit cards, getting you deeper into the black hole of debt.

Other alternatives would be to withdraw from your retirement account, which will also cost you, or beg from family or friends, which we ALL know isn’t the ideal situation.

How much of an emergency stash should you have?

The amount of emergency cash that you need really depends on your own situation. A good rule of thumb is to consider how many incomes you have coming in. In other words, if both people are working full-time, then 3 to 4 months income should be fine, since you would still have one income if the other person suddenly became unemployed. However, if you only have one income, or if that income varies from month to month, you would probably need to have a savings goal of 6 months income. Remember, you are trying to save enough to cover just your monthly living expenses, not to cover your every wish or desire!

Where should you keep this emergency money?

You need to have your emergency fund in an account that you would be able to access in a hurry in case of an emergency. It is a good idea to keep this money set apart from your regular money so that you won’t be tempted to spend it. A separate account in your bank, preferably an interest-bearing savings account, or an online bank account would be good places to keep your emergency money. A money market account or short term certificate of deposit would allow you to earn interest which you then would be required to reinvest, helping your fund to grow even more quickly.

How are you going to fund this emergency account?

The best plan is to HAVE A PLAN. Begin by adding “Emergency Fund” to your list of bills that you pay every month. Assign a dollar amount, write a check for this amount, and pay your savings account each month just like it was a regular bill. If you should pay off a credit card or any monthly debt that you are paying on, then the next month, deposit that same amount into your savings account. You will not be increasing the amount that goes out of your checkbook every month, you will just be re-routing it into your emergency fund.

Another thing that might work for you is to have an automatic bank draft transfer a designated amount from your checking account into your emergency savings account every month. Not having to touch the money makes it easier to save it.

If you have high interest rate credit cards, you could call the credit card companies and ask for a lower interest rate. With a lower interest rate, your monthly payments would then be lower.

Use coupons and store discounts when grocery shopping. Planning what you will buy and eliminating impulse buying will save you a ton of money.

Stop buying silly things. So many times we throw our money away on things we don’t really want or need. Make a promise to yourself that for the next few months, you will buy ONLY what you need to live, and give yourself a head start on saving up an emergency fund.

Don’t set your sights too high to begin with. Break up your savings goals into manageable amounts. For example, start out by trying to save $500, or even $200. Once you have accomplished this, try for another $200. It may be easier to save a smaller amount every week rather than a larger amount once a month. Keep adding to it until you finally reach your goal. Psychologically, it’s much easier to imagine saving $200 than trying to save $20,000.

Any extra money that you come across should also go into the emergency fund. Every night, we drop all of our loose change into a big jar. It doesn’t sound like much, but at the end of a few months, we always seem to have a pretty good sum saved in change.

Any unplanned money that you receive should go into your emergency fund. If you should get a raise, put the difference into the emergency account. If you get birthday money from your parents, into the emergency fund it goes. Look for ways to make extra money. Sell unused items on Ebay. Use your imagination!

When we are living such busy, chaotic lives, having an emergency fund gives you one less thing to panic about. If something unforeseen occurs, you’ve got it covered.