Establishing an emergency fund is the first step toward digging out of debt and building wealth. We’ll take a look at the basics of an emergency fund and hopefully help you get started.
Why
Why do we need an emergency fund? Assuming you are not financially independent yet, emergencies are a fact of life and will happen. Not every emergency can be solved with money but having the financial wherewithal can certainly keep the situation from compounding.
One of the main benefits to an emergency fund is the ability to pay for unforeseen situations without going into further debt with credit cards, loans or lines of credit.
When
When you begin building your emergency fund is obvious; you should begin right away. Building the entire amount needed may vary, however. You should get the initial emergency account funded to at least $1,000 as soon as possible. If you are in debt with interest bearing loans and credit cards you may want to begin paying those down as quickly as possible before saving the rest of your emergency fund.
Where
Your emergency fund should be kept separate from your checking account or any account you use to pay bills and live on. I recommend a no fee, interest bearing checking account or money market account with a debit card. Ideally you can set-up your emergency fund account with the same bank or credit union as your personal checking and savings. The idea behind that is to simplify online transfers and access.
Perhaps the most important thing to consider, other than security, is access. You don’t want your emergency money tied up in investments or accounts that will takes days or weeks to liquidate. Fast access to the funds such as checks, a debit card and/or online transfers can help in an emergency.
How
How to save for emergencies is the hardest question, especially if you are already living check to check. With that said, living on a limited budget is all the more reason to build a financial safety net.
One common suggestion is to save any increase in income rather than increasing your household expenses. Any raises or bonuses should be applied to the emergency fund. Any other income such as income tax refunds, inheritances, winnings and cash gifts can also speed up the savings process.
Another very effective method is setting up an automatic savings plan or even use online bill pay to send regular deposits to your emergency fund. Even just twenty five or fifty dollars every payday will add up quickly if left alone and setup to occur automatically.
It’s a hard choice but a second part-time job may be required to build your emergency fund. Delivering pizzas at night or on the weekends, for example, if you like cars maybe by and sell cars using auctions. This has helped many people save for emergencies as well as other financial needs.
An online or home based business could be a solution. Do the proper research to avoid scams and time wasters, set your goals and earn a profit. Keep in mind that the vast majority of online and home based businesses fail. Due diligence is imperative.
How Much
How much you should ultimately save is a much debated issue and everyone’s circumstances differ. As already discussed above, you should save the initial $1,000 as soon as possible. Then generally one should save four to six months of income or expenses. Special circumstances such as shaky and uncertain employment or caring for someone with extreme medical conditions may require even more in your emergency account:
One last thought on saving for emergencies is consistency. As emergencies arise and affect your fund, you will need to have a plan on how to replace used cash as quickly as possible. The quicker you fully fund the account, the faster your financial vulnerability is replaced with a peace of mind.
Brian David Hawkins maintains a leading financial website http://hotmoneytips.com/ that specializes in money tips and advice. See how you can capitalize with Brian’s free money tips and download his free eBook at http://hotmoneytips.com/ today.
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I know this is an older post but this is classic Dave Ramsey and I’m a huge fan.
I use two accounts for an emergency fund and automate both of them. One is with ING Direct (Orange Savings) with automatic deposits from my checking account here at home. I do this because it’s a little slower to get funds from and it helps me resist using it. The other is a savings account at my local bank with weekly auto transfers from checking. This allows me instant access when an emergency hits and I have to have the cash right now. I can even transfer funds back to checking in just seconds with my phone should I need to use my debit card.
One thing I’ve learned is building an emergency fund is a never ending chore. Emergencies always happen but, wow, having the fund really saves a lot of stress.