Emergency Funds Made Easy
By Theodore Henderson | July 1, 2009
The wise man saves for the future but the foolish man spends whatever he gets. ~ Proverbs 21:20
Why You Need an Emergency Fund
These days it more important than ever to ensure that you have an emergency fund set aside. All of us need an emergency fund set aside for unforeseen disasters such as losing your job, a medical crisis, and major home or automobile repairs. And those categories don’t even cover college tuition for your children. What we are talking about today though is an emergency fund that will carry you through an unforeseen crisis.
What is an emergency fund? It is the cash savings that you can access quickly and easily in urgent situations. The savings usually ranges from three months to a year’s worth of living expenses. So if your living expenses are $2,000 each month, your emergency fund might range from $6,000 to $24,000. I am not limiting this to your house mortgage or rent. I strongly suggest that you sit down with your budget and calculator and determine what it takes for you to live each month including mortgage/rent, utilities, groceries, car payment, gas, home, medical and life insurance, etc. You will undoubtedly find items that you can live without such as cable and extra telephone lines and these are items that you can remove from the emergency fund list.
The primary purpose of an emergency fund is to carry you through periods of joblessness or crisis. It can also be used to cover unexpected expenses that pop up out of nowhere. For instance, I was recently the target of a frivolous legal action and needed an expert legal counsel quickly. This money came out of my emergency fund as top New York attorneys don’t come cheap. It wasn’t something that would go away if ignored and I was grateful to have the money set aside for just such an event.
Your emergency fund should not be used to buy consumer goods or to take expensive vacations. If you have a flat screen TV on your wish list, this will go under a separate savings category and I frankly don’t advise that you purchase large ticket items until you have your emergency fund firmly in place. If you find yourself without a job and the possibility of losing your home, that television will not bring much at the pawn shop.
Savings Strategies
- Start small if putting aside large amounts such as your income tax return isn’t an option. If you don’t already have a savings account, head to your bank with the first hundred dollars that you can put aside and open that account.
- Sign up for online banking. It is a very simple matter to transfer funds from your checking account to your savings account online.
- Schedule regular deposits in this account. Do you use Outlook as your email client? Schedule reminders in your Outlook and then login to transfer funds. It is very satisfying to see that amount grow each time you add to your savings account. Once you get in the habit of making regular deposits, you getout ofthe habit of thinking that you need to spend every dollar in your checking account.
- If you feel it is difficult to begin saving simply start with a small amount. Maybe you begin with $10 or $20 a week initially. If you think you don’t have it then cut back on something frivolous or unnecessary such as giving a pass to the mocha latte at your local coffee house and filling up your coffee mug at home. While this won’t add up all that quickly the important thing is to start putting something away and to make it a habit.
- If your employer’s offers automatic savings deposits from your paycheck you should absolutely enroll in that program. As noted above, by automating this process, it becomes both painless and a good habit to boot. It doesn’t matter the amount, simply having this happen automatically will make certain money is saved every time you are paid.
- If you don’t have direct deposit try another approach. Your bank may be able to link your checking and saving accounts together and establish automated transfers between accounts at a regular interval that you select. If you cash your paycheck twice a month you could establish an automatic transfer of a set amount of money from checking to savings to correspond with this deposit.
Money grows on the tree of patience.” ~ Proverb
Thoughts on Emergency Funds
You need a cash cushion not a credit card. A credit card for emergencies is a prescription for disaster. Use your credit card for short-term immediate emergencies such as paying the tow truck operator because your car broke down but make sure you have a plan to pay it off as quickly as possible. Credit card companies are playing fast and loose with the rules these days and you may well find your interest rate jacked up beyond belief if you are not careful.
Only use emergency funds for real emergencies. Their purposes are to keep you healthy, safe, and ready for the unknown.
The fund must be liquid. You can’t depend on selling your Rolex or that flat screen television as a short term strategy. You can never get what you paid for them and will wind up minus a treasured possession and with no real cash in hand.
How much should you save? Depends on your needs. This is where a written budget is your friend. Sit down and review it often just to make sure that you are always on a good financial track.
When and if you need to tap into your emergency fund keep in mind that these should be used only for essential living expenses.
Be realistic about your emergency fund. Are you in a volatile or seasonal occupation? If so, maybe you need a year’s worth of savings.
You should add a 10-15% addition on top of your monthly expenses just in case you have to hunt for a job.
Count on non-retirement accounts. Don’t count on garage sales.
Keep some cash at home in a fire-proof lock box. Why? Natural disasters may temporarily prevent access to ATM’s.
Look up money market deposit, money market, and savings accounts on Bank Rate.com and be sure to ask your local bank about their interest rates, minimum balance requirements, debit cards, transaction and account fees.
“Make all you can, save all you can, give all you can.” ~ John Wesley
©2009 THJ & Associates, LLC
Topics: economy | No Comments »