How to Establish an Emergency Fund

Without a doubt, emergencies are going to occur and they are going to cost money.  There are all types of financial emergencies that drain our bank accounts including car accidents, broken bones, sick pets, keys locked in cars, dental crowns, busted water heaters, fallen trees, and the list goes on and on.  Everybody needs to have an emergency fund to deal with unexpected expenses. A financial buffer can keep you afloat in a time of need and let you recover without going into debt.  And, well, it just feels good having an emergency fund.  It is a security blanket for adults!

What is an Emergency Fund

An emergency fund is money set aside to cover the financial surprises life throws your way.

Why Do I Need an Emergency Fund?

Without a doubt there will be some financial drain that occurs.  Instead of putting these expenses onto a credit card where you will have to pay interest, bouncing a check, or borrowing from retirement it makes financial sense to have money tucked away for emergencies.  An emergency fund keeps your stress level down.

How Much Money Should be Set Aside?

This is a question up for debate among financial experts.  Start with $250 to $1,000.  That may seem impossible to some people, but small steps will get you there.  I like the $3,000 mark.  It seems like that is enough money set aside to cover almost all expenses.  Some financial experts suggest putting three to six months worth of expenses aside into an emergency fund.  That seems like something we should all strive for since it takes so much dedication.

An emergency is NOT Christmas, vacation, fancy new clothes, or dining out.

Establishing an Emergency Fund

• Make it automatic.  Set up an automatic monthly transfer each month like you would schedule a bill pay.  This forced savings is done on the same day of each month and becomes a healthy savings habit.
• Spend less money.  That sounds like a no brainer, right?
• Eliminate budget busters.
• Sell your old stuff.
• Get a side job.
• Shop around for cheaper auto and home insurance
• Request a rate reduction on your credit cards
• Shop with a grocery list and stick to it.
• Keep the change.
• Save your tax refund.  It doesn’t need to be spent on a fancy new TV or a vacation.  Instead save it!

When Do I Spend an Emergency Fund

You will only spend your emergency fund money when there is an emergency.  Your child’s birthday is not an emergency.  Christmas is not an emergency. A trip to the beach or Disney are also not emergencies.  Emergency funds can be spent in emergency situations that look like:

1. Job loss – and need to continue paying rent, bills and other living expenses
2. Medical or dental emergency
3. Car breaks down, and is your primary form of transportation
4. Emergency home expenses—i.e., your A/C breaks down in 100+ F weather, your roof is leaking, your basement is flooded, your toilet is overflowing, etc.
5. Bereavement-related expenses, like travel costs for a family funeral

It may feel like small things are financial emergencies, but if you are budgeting properly you will have those areas covered in no time.  Your emergency fund will make you feel like you have a financial security blanket.

 Do you have other tips to create an emergency fund?  What has worked in your house?

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