Emergency Funds Made Easy

Proverbs 21:20

The wise man saves for the future but the foolish man spends whatever he gets.

Why You Need an Emergency Fund

All of us need emergency funds for unforeseen emergencies such as losing your job. In other words, a sudden unforeseen crisis.

An emergency fund is cash savings that you can access quickly and easily in emergency situations. The savings usually ranges from three months to a year's worth of living expenses. So, if your living expenses are $2,000 each month, your emergency fund might range from $6,000 to $24,000.

The primary purpose of an emergency fund is to carry you in periods of joblessness or crisis. It can also be used to cover unexpected expenses when you don't have the cash to pay. For example I was recently the target of a frivolous legal action and needed an expert legal counsel quickly so I had to visit my emergency funds. Top New York attorneys don't come cheap.

Your emergency fund should not be used to buy consumer goods or to take expensive vacations. Get your big screen TV another time. If you use your fund for non-emergencies, what will happen when a real emergency appears?

Strategies - Start small if large isn't an option

If you currently don't have an emergency fund or find it difficult to save money the key is to start small. Don't beat yourself up for not having enough saved just start small.

First, if you haven't done so go to your local bank and open up a new savings account, if you currently don't have one, and begin to save with this first until a better strategy comes along.

Second, next step is to get into the habit of making regular deposits into this account. Whether it is weekly, bi-weekly or monthly, create a schedule and stick to it. Once you make saving automatic you won't even have to think about it.

If you feel it is difficult to begin saving simply start with a small amount. Maybe you begin with $10 or $20 a week initially. If you think you don't have it then cut back on something frivolous such as instead of 2 lattes a day one or none should do fine. While this won't amount add up all that quickly the important thing is to start putting something away and to make it a habit. After a few weeks you won't even notice that few dollars missing and you will probably drop five pounds from less milk and cream from your previous latte consumption.

Now that the initial shock of new found discipline has worn off you can bump it up to $15, $20, or even more after a month or so. You will begin to get used to that money not being there and can slightly up it again.

Third, always use automatic savings strategies so you don't have to think about saving. It is already done for you. Set it up with your employer, even if you are self-employed, to go from your check or checking account to your savings account.

It isn't difficult. The technology makes it very easy to set up an automatic savings plan. If you currently have direct deposit through your employer you will find the easiest way to establish this is to have part of your paycheck directly deposited into your savings account as well. It doesn't matter the amount, simply having this happen automatically will make certain money is saved every time you are paid.

If you don't have direct deposit, try another approach. Your bank can link checking and saving accounts together and establish automated transfers between accounts at a regular interval that you select. So if you cash your paycheck twice a month you could establish an automatic transfer of a set amount of money from checking to savings to correspond with this deposit.

"Money grows on the tree of patience."Proverb

Thoughts on Emergency Funds

You need a cash cushion not a credit card. A credit card for emergencies is a prescription for disaster. Use your credit card for short-term immediate emergencies such as paying the tow truck operator because your car broke down.

Only use emergency funds for real emergencies. Their purposes are to keep you healthy, safe, and ready for the unknown.

The fund must be liquid. You can't depend on selling your Rolex as a short term strategy.

How much should you save? Depends on your needs. Change twice yearly just to be sure you are keeping up.

The funds when needed should only be used for monthly essential and monthly obligations.

Be realistic. Are you in a volatile occupation? If so maybe you need a year's worth of savings.

You should add a 10-15% addition on top of your monthly expenses just in case you have to hunt for a job.

Count on non-retirement accounts.

Don't count on garage sales.

If you are working have an auto deduction set up to go directly to your savings or investment account from your check. This is my favorite strategy.

Keep some cash at home. Why? Natural disasters may temporarily prevent access to ATM's

For the rest put it in a federally protected FDIC interest savings account.

Look up money market deposit, money market, and savings accounts on www.bankrate.com

Check out:

Interest rate
Minimum balance
Debit cards
Any minimum transactions
Account fees

"Make all you can, save all you can, give all you can."
John Wesley

©2009 THJ & Associates, LLC