There are always unexpected emergencies that pop-up in life costing us money. Why are we usually caught totally off guard by these financial crises? When it hits the fan, so to speak, and we don’t have any cash to handle it, we often resort to using credit cards. This generally means that we end up paying even more in the form of interest to handle our emergency. A better alternative is to specifically set aside a lump of money called an emergency fund to deal with these situations when they arise.
Excuses for not having an emergency fund.
It seems that most of us agree that an emergency fund is a great idea. If so, then why do so few of us actually have any savings set back? Let’s explore a few of the excuses that exist:
1. I never thought of establishing an emergency fund.
It may have never crossed your mind before. As logical as it is, many of us probably didn’t grow up in a home that had an emergency fund, so it just never occurred to us that we needed one. I know this was the case for me. My parents relied on credit cards as their emergency fund. Again, this is a fast way to run up debt which is not a good idea.
This excuse is officially null and void for you. You have now been notified that you need an emergency fund. We’ll talk more about the specifics in a minute.
2. I don’t have the money for an emergency fund.
I’m sure that this is a very prevalent excuse for not establishing an emergency fund. Of course, the problem is that life doesn’t stop happening just because you don’t have the money. In fact, when you don’t have the money is exactly when life happens. It is when it is the least convenient that the kids get sick, the car needs repairs, the water heater goes out, and it all happens at the same time!
You can’t afford not to have an emergency fund. I suggest looking for ways to legitimately raise your income in order to save enough money for at least a starter emergency fund as soon as possible. You need this to stop the money from running out the hole in the bottom of your bucket!
3. I use my credit card in case of emergency.
Again, this goes against the idea of getting back to the basics of financial wisdom. Earlier I wrote about the pitfalls of debt and why becoming debt-free is the best path to financial success. Some would argue that using a credit card in this manner is okay as long as you pay off the balance every month. Well, that’s a great plan, but the situation we are discussing is one where a personal emergency has occurred. Let’s assume this emergency keeps you from working full-time for an extended period. You may not be able to pay off your credit card at the end of the month. Without an emergency fund, you leave yourself vulnerable.
Using credit in any form as an emergency fund is a bad idea. It will often make a bad situation even worse by creating a financial emergency to go along with whatever else has happened.
The specifics on establishing an emergency fund.
Okay, let’s get down to it. What are the specifics you need to know in order to set up your own emergency fund? Well, it is pretty simple really, but let’s go over the details just so no one gets confused.
1. Save $1,000 cash for a starter emergency fund.
You should create a baby, starter emergency fund as the very first step in getting back to the basics with your money. Some say that you need more than $1,000 as your starter emergency fund. This is a personal decision. I think $1k is a minimum. It is an amount that most people can scrape together pretty quickly if they really set their minds to it. Do what makes you feel comfortable, but do it now!
2. Keep your starter emergency fund in a local savings account.
I am a firm believer that you should keep at least $1k in a local savings account that is easily and quickly accessible to you. Don’t invest it or put it in an account where you can’t immediately withdraw the funds. The whole idea is that this is cash you can use in an emergency. Investing comes later.
3. Only use your emergency fund for real emergencies.
Dave Ramsey often quips, “Why are so many people surprised that Christmas comes in December this year?” Buying Christmas presents is not a reason to dip into your emergency fund. You should only use this money in a real emergency. It should only be used when unexpected, unbudgeted expenses occur. You should budget for likely expenses. The emergency fund is your backstop just in case.
4. Create a fully funded emergency fund when debt-free.
Once you pay off all your debt except your mortgage, then you should add to your emergency fund. The goal is to accumulate 3 to 6 months living expenses. This way if you lose your job or get hurt and can’t work, you can survive financially. Your emergency fund becomes your financial safety net. At this point, you may want to put some of your emergency fund in a money market account. I still like to keep $1,500 in a local savings account, but I put the rest in an account that yields a little more interest.
Establishing an emergency fund will minimize crises.
Once you have an emergency fund, you will be able to breathe a sigh of relief. It will help you to rest a little easier because you will know that you can handle what comes up. This is a much better way to live! I challenge you to try this first step in getting back to the basics with your finances. I think you’ll agree that it is a wise move that will bring you some beginning peace with money.
What are your thoughts on establishing an emergency fund? Did I leave anything out? Leave a comment below and let me know!
Photo by SqueakyMarmot