Create An Emergency Fund
Do You Have An Emergency Fund? Want To Know How to Do It
Are you the type of person who pays their bills on time or even early? Are you careful with your credit card to always pay the balance in full each month so that you don’t incur an interest charge? Are you putting money into a workplace retirement fund? If you can answer yes, that’s great! The next question might not be so easy.
Have you created an emergency (rainy day) fund to take care of those unexpected expenses that always pop up? No? That’s an issue you need to rectify… right now! Don’t worry! It’s not hard to develop an emergency fund; but, it is necessary. If you don’t know how to build an emergency fund, or perhaps are wondering what it is, read on and let us help.
An emergency fund is what it sounds like – money put aside to help you take care of non-budgeted, unexpected expenses such as car repairs, job loss, medical problems, etc.. Many of us think that none of these will happen, however they always do eventually. The old saying “Murphy’s law” began there. (If something can go wrong, it will). If you have an emergency fund in place, you’ll be able to weather the storm with no problem.
The magic questions now, is, how much should I put in my emergency fund? There are many schools of thought on this and if you were to ask three financial planners, you would probably get three different opinions. The general rule of thumb is three to six months of your normal living expenses. Bear in mind that it’s not a “one-size fits all” situation, and if you can put more than six months’ worth of living expenses away, the better off you’ll be.
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When the economy was healthy a few years ago, and the prospect of your landing another job was easy, a smaller emergency fund would suffice. Or perhaps your fund was smaller because your spouse also had a job. But what happens if that second income stops?
The economy today is still far from being healthy in spite of what the White House says. Your spouse can become ill and that income stops. What happens then, especially if you adjusted your lifestyle upward, and it takes two full time incomes to service it? Or suppose Obamacare kicks in and businesses cut back on employee’s hours to qualify them as part time to avoid the cost of providing medical insurance? This is not some far fetched opinion…many businesses have already stated this may have to happen.
What size emergency fund do you think you will need if the above occurs? Jobs are not as plentiful and you need to be certain that your family is taken care of. We are of the opinion now that perhaps your emergency fund should be able to cover one year of living expenses. Would you really be comfortable with any less?
Now that you have your emergency fund set up, where do you put this rainy day money? I’ll get an argument on this one from those who are comfortable with more risk, but I tend to be more conservative. If you invest the fund in the stock market, the value can fluctuate quite a bit, and I prefer to keep it secure. Long term CD’s shouldn’t be used either, because if you have a need for the funds before the CD matures, there is a penalty for early withdrawal.
A compromise may be to invest the fund in a conservative mutual fund that wouldn’t have the market fluctuations of a stock investment. Mutual funds tend to have slow and steady growth, and over a period of a year or more, could increase the value of your emergency fund.
Some other methods that you could use to build up your emergency fund are as follows:
– Getting a second job
– Holding a garage sale
– Eliminating discretionary items in your budget
– Cancel gym memberships
– Shop for better car and home insurance policies
– Use any tax refund to repay short term debt such as credit cards
If you don’t have an emergency fund set up, you should seriously consider starting one as soon as possible. We highly recommend getting a good budgeting program to help you set up goals and to get a handle on your entire financial picture.
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4 responses to “Create An Emergency Fund”
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Gust Lenglet – Platinum Author
Agreed! An emergency fund is a number one priority before you even start to think about investing of any type. When I first started saving for mine, I focused on giving up any kind of discretionary income for a period of time. Difficult? Yes, Worth it? 100% absolutely. It’s a great peace of mind knowing it is there.
Keeping an emergency fund is very important in today’s economy. I’ve always believed in saving 10-15% of my pay check. Unexpected car repairs, loss of second income due to downsizing are just a few of the things I’ve experienced. The secret I use is having the money direct deposited to my savings account. This way I never miss it and don’t have the temptation of spending what should be saved. Thanks for the post…
I love this post because this is a must. I didn’t have an emergency fund and I had to leave my job to take care of my child who was very sick. It was very nerve racking because I did not have an emergency fund setup. I got another job after my child got better but the wait time between the job was not good. I barely made it to the next job and pay check. It really was an eye opener. I hope everyone who reads this puts this information into action.
Very true. I didn’t have an emergency fund and I had to leave my job to take care my child who was very sick! It is really difficult … an emergency fund is really needed! Very useful post with great ideas! Really informative!