Build That Emergency Fund !

emergencyfundToday, I wanted to talk about the Emergency Fund and why it’s absolutely paramount that you build one.  We’re going to dissect what is an emergency fund, why it pays to build one and all the other whistles so that you can see why it pays to get started as soon as humanly possible.

 

What is an Emergency Fund?

In defining just what an emergency fund is and why it’s so important, you may ask just what is an emergency fund.  In my view, an emergency fund is cash flow that you have on hand that is liquid and in savings, so that you don’t have to go into debt or financial hardship to meet unexpected circumstances.

 

Your retirement savings, additional investments, CDs, money market funds and even other savings are usually all safe when you have built a proper emergency fund.

Many good people have gone bankrupt in not heeding the financial advice of building savings for a rainy day.

What about YOU?  You have the power to change your financial future and lifestyle as we speak.

 

Why You Need One

Ever heard that tagline from Nationwide Insurance, “Life comes at you fast “?  Well, nothing is closer to the truth in the real world.  Stuff happens, yes there I said it.  Here’s a list of doodahs that happen to real life people just like you:

  •  Major Car Expenses – can we say broken transmission?
  •  Costly Divorces
  •  Medical Expenses that crop up – not covered by insurance or pre-existing.
  • House repairs – that leaky roof could be major.
  • Unemployment – in the case of job loss
  • Funeral expenses

And the list goes on….

Fortunately, with good discipline, solid financial action and good old fashioned savings techniques, you can build that fund in case of a genuine emergency.

 Isn’t it better to build that fund now in the case you’ll ever need it, than to not have money on hand for emergencies like these??

Figuring the Size You’ll Need for the Emergency Fund

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Save Now !

Now, this could vary depending on what financial guru you speak to, but a general rule of thumb is to save between 3-6 months of living expenses.  This will help to hold you over for finances in the case of events such as job loss e.t.c.

3-6 Months expenses is a good course of action due to the fact that there is also a flight or fight response that usually comes over those that are in a financial crunch.  You’ll find that they generally hold on to money better, make wiser financial decisions and overall will decrease expenses.

This is critical thinking just as a new retiree going into retirement would do well to adjust their lifestyle to their new level of income.

If you’ve been using a budget for your financesgood job.  You’ll need it here for the following exercise of calculating your expenses.  First, you’ll want to look at your budget and cross off the items that are not necessary to your living arrangements such as entertainment, eating out, new clothes, vacationing e.t.c.  Please note that these are wants vs. needs.

In the next section, you want to list the absolute necessary expenses that you need to live off of.  Such expenses such as (do this even if you didn’t have a budget before):

  • Fixed Monthly Expenses – think of expenses here like mortgage payment (or rent), vehicle payments, Insurance payments, school fees and so on. Note here that ‘luxury’ expenses such as gym memberships, premium tv, lawn service and other such fixed memberships can be cancelled with given notice in the case of financial hardship.
  • Variable Expenses – these expenses can be things like gas, car maintenance, Utility expenses, Prescriptions and the list goes on.  Think of expenses that are necessary, yet have a variable cost and never fixed.
  • Other Required Expenses –these can be expenses that don’t fall in the categories above.  Expenses such as taxes, insurance premiums, credit card repayments and so on.

The important thing to do now is to add up all those expenses determined from above and there you have it.  You’ll have the minimum for your expenses which will help guide you on building 3-6 months worth of expenses.

In the case of job loss here, you’ll want to factor in your ‘employment hunting’ expenses such as gas, paper and ink, newspaper fund for ads, internet time for online job searches and others like this.

 

How to Start Your Emergency Fund

If you don’t have anything of an emergency fund right now, you haven’t done the greatest job with savings. In this case, and let me reiterate this, Start Small! 

This could be as simple as depositing as little as $50 into a higher interest bearing account.  Remember to pay off debt and stay out of debt along the way.  The most important thing here is to get started right away.  Most of all, stay consistent and have fun! Remember to reward yourself along the way.  Rewarding yourself should be easy on the wallet, like going out of yogurt with the family e.t.c.

Nothing will dash your emergency fund faster than overwhelming yourself faster than trying to save too quickly for your emergency fund when you are new to saving properly.

The notion that I would like to get you to get through your head is this:

 Emergencies happen when you least expect them. 

So, you might as well prepare for them in your best ability.  By making great financial choices as well as simple lifestyle changes, you can keep the wealth you have now and even grow it at an even greater rate.

I wish you luck in building that emergency fund that you may have been putting off till now.  Take it from me, it takes the first step to travel 100 miles, but you’ve got to start.  The earlier you start, the faster you can start the snow ball effect of saving till you have that account fully funded!

 

 

 

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Category: Personal Finance

  • NoviceFinancialExpert

    Here is a strategy that can “kill two birds with one stone”: I keep a minimum of $1,000 in a savings account that I can access immediately for emergencies.  I then put as much as possible ($5,000/year) into a Roth IRA that can be used for “severe” (e.g., loss of job) financial hardship.  That Roth money is on top of maxing out my 403(b) and 457(b).  I am supplementing my retirement with a “tax hedge” and establishing an emergency fund simultaneously.  Some may disagree with the approach but, I do not see the downside. 

  • dwightanthony

     Vincent, I really like that approach as well.  At least the Roth IRA is
    building good stable wealth for you and it’s the right approach in this
    economy.  On the other hand, work on bolstering your savings at least 4
    fold, you want savings that’s very liquid and will make you sleep
    better at night.

    Dwight Anthony

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