Create an Emergency Fund
3 Lame Excuses Not to Create an Emergency Fund
If you were asked to think back through your own life, and name the one item that topped the list of money management tips, what would it be? We would get many different answers on that question, but the one that tops the list, is create an emergency fund.
Many individuals ask why? There are so many “emergencies” in life that can happen. An unexpected root canal, extensive car repairs, a home large appliance dies, or even worse, you could lose your job. If you don’t have the cash to cover these items, many look to a credit card or even a personal loan, to cover it.
Another scenario…suppose you needed higher take home pay each week to meet your regular expenses. You changed your exemptions to lower tax withholding to increase your net check. Tax time rolls around and then the shock hits you. A balance is due to the IRS and your state for $5,000.00. You have no cash to pay it, and your credit cards are maxed out. Now what?
[bctt tweet=”Don’t be caught without an emergency fund. Could be a disaster.” username=”HBSMoneyTips”]
So many find themselves in similar situations, yet they either procrastinate or deny that they really need an emergency fund. Folks, you can make any excuse that you want, but the plain fact is, it’s not a question of IF an emergency will happen, it’s WHEN.
We’re listing just a few of the most common reasons here as to why you don’t set up an emergency fund.
Reason 1 – I just can’t afford to put money aside
Look at it this way, if you don’t think you can afford to set aside a small amount of money each month in an emergency cash fund, where will the money come from when an actual emergency hits? Don’t be caught in that trap. It’s very unpleasant and can be devastating.
The time that you need to begin an emergency fund is when you’re just starting out and probably living paycheck to paycheck. I think we can all agree on that. You don’t want some unforeseen event to happen, and then it puts you in a position where you will have to borrow money (if you can). Starting out with heavy debt will just keep you in that position with no chance to get ahead financially.
You need to eventually have an emergency fund with cash set aside to cover your living expenses for at least three to six months, preferably more. No one is expected to put that much away at once, but start now. Create a manageable budget first of all and have a budget item for an emergency fund. You don’t have to be a high wage earner to do this either. Saving for an emergency requires discipline, more than it does income.
Some individuals get started by increasing their take home pay. They know that they get a large refund at tax time, and when it comes in, they blow it. They do a calculation using their current income and expenses, and know how much they can increase their paychecks each week. That extra take home pay can be budgeted to go to an emergency fund, and will add up.
After you create a budget, the time comes to track your spending for a month to see just where all of your money goes. Cut back and/or eliminate as many discretionary expenses as possible to provide more money for the emergency fund. You can even have your employer withhold an amount from each paycheck for savings.
Reason 2 – I have a credit card to use for an emergency
Maybe and maybe not. Suppose you’re out on some trip and your car breaks down? The only auto shop in town doesn’t take credit cards. What do you do? Granted, this may be rare, but it’s happened before. Suppose, your credit card is maxed out? It’s not a good idea to use credit cards or other debt to cover an emergency. Once you get in that debt spiral, it can be very hard to get out.
Reason 3 – There are other sources of cash I can withdraw
Some go so far as to withdraw money from IRA’s or their 401(k) and then get hit with additional taxes plus a 10% penalty. A very bad idea. Be careful as well, in using a home equity line of credit to cover these emergencies. Most individuals yield to the temptation of paying interest only and are in no hurry to repay the principal. In addition, many lenders are cutting back on lines of credit, so be careful.
So, you’ve started an emergency fund and have some cash accumulated. Where do you put it? You want that fund to be liquid and available at a moment’s notice. We recommend that you keep it in a money market account at your bank. Savings interest rates are very low, but the principal amount is liquid and safe. If you can find a money market account that pays a higher rate, be sure to see if you have instant access to the funds when an emergency arrives. This cash should not be tied up in any way.
Some financial planners recommend having your emergency cash fund in a money market mutual fund. However, many of those have fees and balance requirements. We strongly recommend that you begin now to create a budget and set up an emergency fund, Do your best to prepare for that rainy day that WILL come. And it will.
An accountant and tax preparer by profession, Gust’s true passion lies in his company blog titled “HBS Financial Group, Ltd.”. Through this venue, he not only tries to teach individuals about budgeting, money management, and taxation but he writes the majority of the articles as well.