I refer many times both on the website and in my downloads about the importance of having an emergency fund – a “stash of cash” if you like which is enough to get you through life’s little emergencies
It’s important to create an emergency fund – it gives you a little bit of security if things go wrong or you need to make a spend without much notice – for instance if the car needs repairs or the fridge breaks down
But how much do you need to keep in an emergency fund?
The answer (and you’ll get used to this when you read my website) is that “it depends”……. the “it depends” being based on your own family situation
Suze Orman (of Oprah fame) recommends around 8 months of living expenses based roughly on the average amount of time it takes to find new employment if you get made redundant. That could be quite a bit of money to an ordinary person and to me seems a bit daunting so for the purposes of this article and “getting started” lets consider something a bit smaller
A sensible approach I think is discussed on the simple dollar site which talks about an emergency fund of around 1000 dollars (or pounds or Euros) which you have readily available to you should you need it when things go wrong. Everything else should go into a savings fund which is actually earning you interest
I like that idea – just a bucket of money you have available readily for emergency funding – which is not a credit card (which we are trying to avoid) and not savings which will take some time to access (and are earning interest)
So let’s just assume for the sake of argument that our “emergency fund” is going to be about $1K dollars in an account where you can withdraw it easily
If you are living paycheck to paycheck and just about getting by month on month then such an approach may be a bit difficult for you – but with a little discipline and forethought (and a plan of action), you should be able to get enough money together to create such a fund
10 Top Tips for Creating an Emergency Fund
Here are some top tips for you to start putting together your emergency fund and to maintain it even if you have to dip into it
1. Check your existing insurances and warranties
Some of the things which you want may consider candidates for an emergency fund may be better covered by insurance or warranty
For instance, we have our two most essential household appliances – the fridge and the washing machine – covered by an annual warranty. The TV and the dishwasher we choose not to
And review your insurances – particularly your buildings and contents insurance and check what you are covered for and what you aren’t and if necessary up the insurance
Also consider what benefits your employer offers you – health insurance, critical illness cover, redundancy payments
By reviewing your current (and potentially future) “cover” you are best placed to estimate what your emergency fund needs to cover, and therefore how much you should be putting aside
2. Start off small.
You don’t need to have a lot of money to put away in order to fund an emergency account.
I am a great believer in starting of small but doing something consistently every day to work towards your final goal
So just start by putting away anything you can spare – even into a jar in the kitchen cupboard (but better into an easily accessible bank account)
Strive to tuck away at least 10 to 20 dollars, pounds or Euros per week into a separate bank account and by the end of the year you will have hit the 1K mark
3. Pay yourself first.
Use an automatic deduction through your bank to take a small portion of your paycheck and add it to your savings account.
When the money is deducted automatically, it’s less “painful.”
Sometimes it is a money mindset thing but treat “paying yourself” as one of your payment essentials
4. Reduce your expenses.
Take a hard look at how you’re spending money and determine ways to reduce your current expenses.
Take the amount you save and apply it directly toward your emergency fund.
Don’t pat yourself on the back and go and buy a new pair of shoes you don’t really need
Treat the creation of your emergency fund as an achievement and celebrate it as such
Think about temporarily cutting out some of your expenses – skip going out for a few weeks, cut out alcohol, or reduce your TV subscriptions.
You can always add them back in again later if you are really missing them
5. Make payments to yourself when you have paid something off.
After you finish paying a debt off, such as a car payment or a credit card bill, take whatever money you would normally put into that debt and put it into your savings account.
Your budget won’t take a hit;
Yet you’ll be putting significant money into your emergency fund every month.
6. Stash bonuses and tax refunds.
When you receive a bonus from work or a tax refund, stash this windfall directly in your emergency fund account.
Out of sight, out of mind.
Now you can put this money toward a better purpose – your emergency fund – rather than an impulse purchase that you may regret later.
7. Save your change.
Make your purchases in cash whenever possible, and save the change.
Stash it away until you have a substantial amount; then put it in your bank.
The same can be done with $1 bills. Whenever you break a larger bill, just stash the ones away and turn them in when you have a substantial amount.
8. Have a garage sale.
Sell items that you don’t need, including stuff you’ve stored in the garage or in the loft
If you have things in your life that you can live without, sell them and put the proceeds into your emergency fund.
This way, when an emergency comes up, you’ll have the money that you need to protect what’s most important to you.
9. Think twice before a withdrawal
Apply good spending habits to your emergency fund as well and before withdrawing anything from it take a step back and ask yourself – “is this really what my emergency fund was intended for?”
Just pause, give it 24 hours if you can, and make the decision in the morning
And if you do need to delve into your emergency fund, put in place actions to restore it to what it was using the tips on this page
10. Encourage the family
Encourage the family to adopt the same approach and if you have teenage kids encourage them to get a job and start funding some of their own expenses like school trips
Before you know it they will have their own little “emergency funds” and not be relying on you to delve into yours when the next teenage crisis hits them
Creating an Emergency Fund – The Bottom Line
It doesn’t take much to begin an emergency fund, and every dollar, pound and euro counts
Remember, if you can get to the magic $1000 mark then you will be well on your way to covering yourself and your family should a crisis occur
Remember – to be prepared financially in case of an emergency is one of the smartest moves you can make for yourself and your family.